Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the fourth quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Sunstone Hotel Investors Inc (NYSE:SHO) changed recently.
Sunstone Hotel Investors Inc (NYSE:SHO) was in 16 hedge funds' portfolios at the end of the fourth quarter of 2018. SHO shareholders have witnessed an increase in hedge fund sentiment lately. There were 9 hedge funds in our database with SHO positions at the end of the previous quarter. Our calculations also showed that SHO isn't among the 30 most popular stocks among hedge funds.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.
We're going to go over the key hedge fund action surrounding Sunstone Hotel Investors Inc (NYSE:SHO).
How have hedgies been trading Sunstone Hotel Investors Inc (NYSE:SHO)?
Heading into the first quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 78% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SHO over the last 14 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Elliott Management held the most valuable stake in Sunstone Hotel Investors Inc (NYSE:SHO), which was worth $19.1 million at the end of the third quarter. On the second spot was Balyasny Asset Management which amassed $13.1 million worth of shares. Moreover, Two Sigma Advisors, Echo Street Capital Management, and Renaissance Technologies were also bullish on Sunstone Hotel Investors Inc (NYSE:SHO), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, specific money managers were breaking ground themselves. Elliott Management, managed by Paul Singer, established the biggest position in Sunstone Hotel Investors Inc (NYSE:SHO). Elliott Management had $19.1 million invested in the company at the end of the quarter. Greg Poole's Echo Street Capital Management also initiated a $9.2 million position during the quarter. The other funds with new positions in the stock are Jeffrey Furber's AEW Capital Management, Stuart J. Zimmer's Zimmer Partners, and Mike Vranos's Ellington.
Let's now take a look at hedge fund activity in other stocks similar to Sunstone Hotel Investors Inc (NYSE:SHO). We will take a look at Neogen Corporation (NASDAQ:NEOG), Healthcare Services Group, Inc. (NASDAQ:HCSG), Banco Macro SA (NYSE:BMA), and Cornerstone OnDemand, Inc. (NASDAQ:CSOD). This group of stocks' market caps are similar to SHO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NEOG,14,41026,2 HCSG,12,34987,1 BMA,17,174348,5 CSOD,31,601148,3 Average,18.5,212877,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $213 million. That figure was $81 million in SHO's case. Cornerstone OnDemand, Inc. (NASDAQ:CSOD) is the most popular stock in this table. On the other hand Healthcare Services Group, Inc. (NASDAQ:HCSG) is the least popular one with only 12 bullish hedge fund positions. Sunstone Hotel Investors Inc (NYSE:SHO) 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 SHO wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); SHO investors were disappointed as the stock returned 10.8% 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.