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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards The Children's Place Inc. (NASDAQ:PLCE).
Is PLCE a good stock to buy now? The Children's Place Inc. (NASDAQ:PLCE) shareholders have witnessed a decrease in activity from the world's largest hedge funds of late. The Children's Place Inc. (NASDAQ:PLCE) was in 16 hedge funds' portfolios at the end of September. The all time high for this statistic is 29. Our calculations also showed that PLCE isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 113% since March 2017 and outperformed the S&P 500 ETFs by more than 66 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Peter Rathjens of Arrowstreet Capital
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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. With all of this in mind we're going to take a look at the fresh hedge fund action encompassing The Children's Place Inc. (NASDAQ:PLCE).
Do Hedge Funds Think PLCE Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -30% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in PLCE a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
The largest stake in The Children's Place Inc. (NASDAQ:PLCE) was held by Balyasny Asset Management, which reported holding $15.3 million worth of stock at the end of September. It was followed by D E Shaw with a $13.7 million position. Other investors bullish on the company included Point72 Asset Management, Arrowstreet Capital, and Kettle Hill Capital Management. In terms of the portfolio weights assigned to each position Kettle Hill Capital Management allocated the biggest weight to The Children's Place Inc. (NASDAQ:PLCE), around 1.93% of its 13F portfolio. Invenomic Capital Management is also relatively very bullish on the stock, setting aside 1.51 percent of its 13F equity portfolio to PLCE.
Because The Children's Place Inc. (NASDAQ:PLCE) has experienced declining sentiment from the smart money, it's safe to say that there was a specific group of fund managers who sold off their full holdings heading into Q4. Interestingly, Bruce Emery's Greenvale Capital dropped the biggest position of the "upper crust" of funds tracked by Insider Monkey, comprising close to $46.9 million in stock. Chuck Royce's fund, Royce & Associates, also sold off its stock, about $11.2 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 7 funds heading into Q4.
Let's now take a look at hedge fund activity in other stocks similar to The Children's Place Inc. (NASDAQ:PLCE). We will take a look at Tekla Life Sciences Investors (NYSE:HQL), WAVE Life Sciences Ltd. (NASDAQ:WVE), Arlo Technologies, Inc. (NYSE:ARLO), ASA Gold and Precious Metals Ltd (NYSE:ASA), U.S. Xpress Enterprises, Inc. (NYSE:USX), ProPetro Holding Corp. (NYSE:PUMP), and Beazer Homes USA, Inc. (NYSE:BZH). This group of stocks' market caps resemble PLCE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HQL,2,1362,0 WVE,24,163279,7 ARLO,16,43387,1 ASA,5,14951,0 USX,12,14049,6 PUMP,17,40802,-1 BZH,15,30587,-4 Average,13,44060,1.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $44 million. That figure was $84 million in PLCE's case. WAVE Life Sciences Ltd. (NASDAQ:WVE) is the most popular stock in this table. On the other hand Tekla Life Sciences Investors (NYSE:HQL) is the least popular one with only 2 bullish hedge fund positions. The Children's Place Inc. (NASDAQ:PLCE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PLCE is 46.4. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on PLCE as the stock returned 51.7% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.