At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Sohu.com Limited (NASDAQ:SOHU) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Is Sohu.com Limited (NASDAQ:SOHU) an excellent investment now? The best stock pickers were becoming less hopeful. The number of long hedge fund positions dropped by 1 recently. Our calculations also showed that SOHU isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). SOHU was in 10 hedge funds' portfolios at the end of the first quarter of 2020. There were 11 hedge funds in our database with SOHU positions at the end of the previous quarter. 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.
[caption id="attachment_746893" align="aligncenter" width="400"] Paul Marshall of Marshall Wace[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's review the new hedge fund action encompassing Sohu.com Limited (NASDAQ:SOHU).
Hedge fund activity in Sohu.com Limited (NASDAQ:SOHU)
Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the fourth quarter of 2019. By comparison, 9 hedge funds held shares or bullish call options in SOHU a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Sohu.com Limited (NASDAQ:SOHU), with a stake worth $19.6 million reported as of the end of September. Trailing Renaissance Technologies was Orbis Investment Management, which amassed a stake valued at $12.5 million. Hillhouse Capital Management, Maso Capital, 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 Maso Capital allocated the biggest weight to Sohu.com Limited (NASDAQ:SOHU), around 0.62% of its 13F portfolio. Ionic Capital Management is also relatively very bullish on the stock, earmarking 0.33 percent of its 13F equity portfolio to SOHU.
Judging by the fact that Sohu.com Limited (NASDAQ:SOHU) has faced a decline in interest from hedge fund managers, it's safe to say that there was a specific group of funds that decided to sell off their full holdings in the first quarter. It's worth mentioning that Paul Marshall and Ian Wace's Marshall Wace LLP sold off the largest stake of the "upper crust" of funds watched by Insider Monkey, totaling about $1.1 million in stock, and Michael Gelband's ExodusPoint Capital was right behind this move, as the fund cut about $0.4 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds in the first quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Sohu.com Limited (NASDAQ:SOHU) but similarly valued. We will take a look at Albireo Pharma, Inc. (NASDAQ:ALBO), Hoegh LNG Partners LP (NYSE:HMLP), Preformed Line Products Company (NASDAQ:PLPC), and Retail Value Inc. (NYSE:RVI). All of these stocks' market caps match SOHU's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALBO,10,55546,-2 HMLP,6,15718,1 PLPC,7,22936,0 RVI,13,72113,-3 Average,9,41578,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $42 million in SOHU's case. Retail Value Inc. (NYSE:RVI) is the most popular stock in this table. On the other hand Hoegh LNG Partners LP (NYSE:HMLP) is the least popular one with only 6 bullish hedge fund positions. Sohu.com Limited (NASDAQ:SOHU) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on SOHU as the stock returned 47.8% in Q2 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.