It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Sonic Automotive Inc (NYSE:SAH).
Is Sonic Automotive Inc (NYSE:SAH) the right pick for your portfolio? The smart money is in an optimistic mood. The number of bullish hedge fund bets went up by 1 in recent months. Our calculations also showed that sah isn't among the 30 most popular stocks among hedge funds. SAH was in 10 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 9 hedge funds in our database with SAH holdings at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
We're going to take a peek at the latest hedge fund action surrounding Sonic Automotive Inc (NYSE:SAH).
Hedge fund activity in Sonic Automotive Inc (NYSE:SAH)
Heading into the first quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SAH over the last 14 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Ken Griffin's Citadel Investment Group has the number one position in Sonic Automotive Inc (NYSE:SAH), worth close to $2.3 million, comprising less than 0.1%% of its total 13F portfolio. The second largest stake is held by Marshall Wace LLP, managed by Paul Marshall and Ian Wace, which holds a $2.3 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism encompass D. E. Shaw's D E Shaw, Ian Cumming and Joseph Steinberg's Leucadia National and Paul Tudor Jones's Tudor Investment Corp.
With a general bullishness amongst the heavyweights, specific money managers have been driving this bullishness. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, initiated the most outsized position in Sonic Automotive Inc (NYSE:SAH). Marshall Wace LLP had $2.3 million invested in the company at the end of the quarter. Matthew Hulsizer's PEAK6 Capital Management also made a $0.2 million investment in the stock during the quarter. The following funds were also among the new SAH investors: Andrew Feldstein and Stephen Siderow's Blue Mountain Capital, Benjamin A. Smith's Laurion Capital Management, and Matthew Hulsizer's PEAK6 Capital Management.
Let's now take a look at hedge fund activity in other stocks similar to Sonic Automotive Inc (NYSE:SAH). These stocks are Upland Software Inc (NASDAQ:UPLD), Johnson Outdoors Inc. (NASDAQ:JOUT), M/I Homes Inc (NYSE:MHO), and KNOT Offshore Partners LP (NYSE:KNOP). All of these stocks' market caps resemble SAH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UPLD,25,105107,5 JOUT,12,57312,-1 MHO,12,34578,-2 KNOP,5,7135,1 Average,13.5,51033,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $51 million. That figure was $10 million in SAH's case. Upland Software Inc (NASDAQ:UPLD) is the most popular stock in this table. On the other hand KNOT Offshore Partners LP (NYSE:KNOP) is the least popular one with only 5 bullish hedge fund positions. Sonic Automotive Inc (NYSE:SAH) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately SAH wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); SAH investors were disappointed as the stock returned 10.6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.