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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Telephone & Data Systems, Inc. (NYSE:TDS) and determine whether hedge funds had an edge regarding this stock.
Telephone & Data Systems, Inc. (NYSE:TDS) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds' portfolios at the end of June. Our calculations also showed that TDS isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Sterling Bancorp (NYSE:STL), Old National Bancorp (NASDAQ:ONB), and TC Pipelines, LP (NYSE:TCP) to gather more data points. Our calculations also showed that TDS isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 S&P 500 ETFs by 58 percentage points since March 2017 (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.
Ken Griffin of Citadel Investment Group
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We are also checking out this lithium company which could benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's take a gander at the key hedge fund action surrounding Telephone & Data Systems, Inc. (NYSE:TDS).
How are hedge funds trading Telephone & Data Systems, Inc. (NYSE:TDS)?
At the end of the second quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TDS over the last 20 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, holds the biggest position in Telephone & Data Systems, Inc. (NYSE:TDS). Renaissance Technologies has a $59.5 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is GAMCO Investors, managed by Mario Gabelli, which holds a $36.3 million position; 0.4% of its 13F portfolio is allocated to the stock. Some other professional money managers that hold long positions encompass Cliff Asness's AQR Capital Management, Hari Hariharan's NWI Management and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position NWI Management allocated the biggest weight to Telephone & Data Systems, Inc. (NYSE:TDS), around 1.22% of its 13F portfolio. Game Creek Capital is also relatively very bullish on the stock, designating 0.98 percent of its 13F equity portfolio to TDS.
Due to the fact that Telephone & Data Systems, Inc. (NYSE:TDS) has faced falling interest from the smart money, logic holds that there was a specific group of fund managers that elected to cut their positions entirely in the second quarter. Interestingly, Paul Tudor Jones's Tudor Investment Corp dropped the largest position of the "upper crust" of funds watched by Insider Monkey, valued at close to $1.5 million in stock. Donald Sussman's fund, Paloma Partners, also cut its stock, about $0.7 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to Telephone & Data Systems, Inc. (NYSE:TDS). These stocks are Sterling Bancorp (NYSE:STL), Old National Bancorp (NASDAQ:ONB), TC Pipelines, LP (NYSE:TCP), Sunoco LP (NYSE:SUN), American Equity Investment Life Holding Company (NYSE:AEL), YPF Sociedad Anonima (NYSE:YPF), and Teradata Corporation (NYSE:TDC). This group of stocks' market caps are closest to TDS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STL,27,179819,2 ONB,17,25811,2 TCP,2,2582,0 SUN,4,14541,0 AEL,12,49529,0 YPF,8,19521,-5 TDC,31,238067,7 Average,14.4,75696,0.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.4 hedge funds with bullish positions and the average amount invested in these stocks was $76 million. That figure was $175 million in TDS's case. Teradata Corporation (NYSE:TDC) is the most popular stock in this table. On the other hand TC Pipelines, LP (NYSE:TCP) is the least popular one with only 2 bullish hedge fund positions. Telephone & Data Systems, Inc. (NYSE:TDS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TDS is 59.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately TDS wasn't nearly as popular as these 10 stocks and hedge funds that were betting on TDS were disappointed as the stock returned -6.5% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.