We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Viacom, Inc. (NASDAQ:VIAB).
Is Viacom, Inc. (NASDAQ:VIAB) going to take off soon? Prominent investors are taking a pessimistic view. The number of long hedge fund positions shrunk by 4 lately. Our calculations also showed that VIAB isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). VIAB was in 37 hedge funds' portfolios at the end of the third quarter of 2019. There were 41 hedge funds in our database with VIAB holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
[caption id="attachment_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to review the latest hedge fund action encompassing Viacom, Inc. (NASDAQ:VIAB).
How are hedge funds trading Viacom, Inc. (NASDAQ:VIAB)?
Heading into the fourth quarter of 2019, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. On the other hand, there were a total of 33 hedge funds with a bullish position in VIAB a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Arrowstreet Capital held the most valuable stake in Viacom, Inc. (NASDAQ:VIAB), which was worth $120.5 million at the end of the third quarter. On the second spot was Ariel Investments which amassed $94.3 million worth of shares. AQR Capital Management, GAMCO Investors, and Tremblant Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Tremblant Capital allocated the biggest weight to Viacom, Inc. (NASDAQ:VIAB), around 3.29% of its portfolio. Water Island Capital is also relatively very bullish on the stock, setting aside 1.32 percent of its 13F equity portfolio to VIAB.
Since Viacom, Inc. (NASDAQ:VIAB) has experienced falling interest from the smart money, we can see that there were a few hedge funds that slashed their entire stakes heading into Q4. Intriguingly, David Fiszel's Honeycomb Asset Management cut the largest position of the 750 funds monitored by Insider Monkey, totaling an estimated $44.8 million in stock, and Nick Niell's Arrowgrass Capital Partners was right behind this move, as the fund said goodbye to about $24.6 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 4 funds heading into Q4.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Viacom, Inc. (NASDAQ:VIAB) but similarly valued. We will take a look at LKQ Corporation (NASDAQ:LKQ), Allegion plc (NYSE:ALLE), Aqua America Inc (NYSE:WTR), and StoneCo Ltd. (NASDAQ:STNE). This group of stocks' market caps are closest to VIAB's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LKQ,41,1409448,-4 ALLE,26,450412,2 WTR,33,832797,12 STNE,28,1337452,1 Average,32,1007527,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $1008 million. That figure was $727 million in VIAB's case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Allegion plc (NYSE:ALLE) is the least popular one with only 26 bullish hedge fund positions. Viacom, Inc. (NASDAQ:VIAB) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately VIAB wasn't nearly as popular as these 20 stocks and hedge funds that were betting on VIAB were disappointed as the stock returned 0.2% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.