You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund managers like Jeff Ubben, George Soros and Seth Klarman hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked 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 market by 40 percentage points since May 2014 through May 30, 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.
Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a gander at the new hedge fund action encompassing Leidos Holdings Inc (NYSE:LDOS).
How have hedgies been trading Leidos Holdings Inc (NYSE:LDOS)?
At the end of the second quarter, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LDOS over the last 16 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, John Smith Clark's Southpoint Capital Advisors has the most valuable position in Leidos Holdings Inc (NYSE:LDOS), worth close to $151.7 million, comprising 5.7% of its total 13F portfolio. The second largest stake is held by GLG Partners, managed by Noam Gottesman, which holds a $63 million position; 0.2% of its 13F portfolio is allocated to the stock. Remaining professional money managers that hold long positions include Robert Pohly's Samlyn Capital, John Overdeck and David Siegel's Two Sigma Advisors and D. E. Shaw's D E Shaw.
Now, some big names have been driving this bullishness. Winton Capital Management, managed by David Harding, initiated the most outsized position in Leidos Holdings Inc (NYSE:LDOS). Winton Capital Management had $8.8 million invested in the company at the end of the quarter. Bruce Kovner's Caxton Associates LP also made a $1.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Ronald Hua's Qtron Investments, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, and Matthew Tewksbury's Stevens Capital Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Leidos Holdings Inc (NYSE:LDOS) but similarly valued. These stocks are Telecom Italia S.p.A. (NYSE:TI), Trimble Inc. (NASDAQ:TRMB), Arconic Inc. (NYSE:ARNC), and Jacobs Engineering Group Inc (NYSE:JEC). All of these stocks' market caps are similar to LDOS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TI,1,3257,0 TRMB,16,687865,2 ARNC,42,3395555,8 JEC,32,1045023,-1 Average,22.75,1282925,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $1283 million. That figure was $416 million in LDOS's case. Arconic Inc. (NYSE:ARNC) is the most popular stock in this table. On the other hand Telecom Italia S.p.A. (NYSE:TI) is the least popular one with only 1 bullish hedge fund positions. Leidos Holdings Inc (NYSE:LDOS) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks (see the video below) among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on LDOS as the stock returned 8% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.