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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Quad/Graphics, Inc. (NYSE:QUAD) to find out whether there were any major changes in hedge funds' views.
Is QUAD a good stock to buy now? Prominent investors were in a bearish mood. The number of bullish hedge fund positions decreased by 3 in recent months. Quad/Graphics, Inc. (NYSE:QUAD) was in 8 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 22. Our calculations also showed that QUAD 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.
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 S&P 500 ETFs by more than 66 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. 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.
David Siegel of Two Sigma Advisors
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 5 best cheap stocks to buy according to Ray Dalio to identify stocks with upside potential. 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. Keeping this in mind we're going to take a look at the key hedge fund action regarding Quad/Graphics, Inc. (NYSE:QUAD).
How have hedgies been trading Quad/Graphics, Inc. (NYSE:QUAD)?
Heading into the fourth quarter of 2020, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -27% from the previous quarter. The graph below displays the number of hedge funds with bullish position in QUAD over the last 21 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Miller Value Partners was the largest shareholder of Quad/Graphics, Inc. (NYSE:QUAD), with a stake worth $3.4 million reported as of the end of September. Trailing Miller Value Partners was Renaissance Technologies, which amassed a stake valued at $2.8 million. Arrowstreet Capital, D E Shaw, and Two Sigma Advisors 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 Miller Value Partners allocated the biggest weight to Quad/Graphics, Inc. (NYSE:QUAD), around 0.12% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, dishing out 0.0028 percent of its 13F equity portfolio to QUAD.
Seeing as Quad/Graphics, Inc. (NYSE:QUAD) has experienced falling interest from the smart money, it's safe to say that there is a sect of hedge funds that slashed their positions entirely heading into Q4. At the top of the heap, Donald Sussman's Paloma Partners dumped the biggest stake of all the hedgies monitored by Insider Monkey, comprising an estimated $0.1 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund dropped about $0.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 3 funds heading into Q4.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Quad/Graphics, Inc. (NYSE:QUAD) but similarly valued. These stocks are Anworth Mortgage Asset Corporation (NYSE:ANH), Green Plains Partners LP (NASDAQ:GPP), Northrim BanCorp, Inc. (NASDAQ:NRIM), Century Casinos, Inc. (NASDAQ:CNTY), Soliton, Inc. (NASDAQ:SOLY), Apyx Medical Corporation (NASDAQ:APYX), and Glory Star New Media Group Holdings Limited (NASDAQ:GSMG). This group of stocks' market valuations resemble QUAD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ANH,11,24320,-1 GPP,2,14829,0 NRIM,11,13227,0 CNTY,10,23955,0 SOLY,1,7831,-6 APYX,6,24317,-2 GSMG,9,613,2 Average,7.1,15585,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.1 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $9 million in QUAD's case. Anworth Mortgage Asset Corporation (NYSE:ANH) is the most popular stock in this table. On the other hand Soliton, Inc. (NASDAQ:SOLY) is the least popular one with only 1 bullish hedge fund positions. Quad/Graphics, Inc. (NYSE:QUAD) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for QUAD is 47.9. 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 31.6% in 2020 through December 2nd and still beat the market by 16 percentage points. Hedge funds were also right about betting on QUAD as the stock returned 12.9% since the end of Q3 (through 12/2) 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.