Legendary investors such as Jeffrey Talpins and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don't publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That's why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Tencent Music Entertainment Group (NYSE:TME) from the perspective of those elite funds.
Tencent Music Entertainment Group (NYSE:TME) has seen a decrease in activity from the world's largest hedge funds in recent months. TME was in 20 hedge funds' portfolios at the end of the first quarter of 2019. There were 25 hedge funds in our database with TME holdings at the end of the previous quarter. Our calculations also showed that tme isn't among the 30 most popular stocks among hedge funds.
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 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.
Let's take a peek at the fresh hedge fund action encompassing Tencent Music Entertainment Group (NYSE:TME).
How have hedgies been trading Tencent Music Entertainment Group (NYSE:TME)?
At Q1's end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in TME 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, Tiger Global Management held the most valuable stake in Tencent Music Entertainment Group (NYSE:TME), which was worth $93.7 million at the end of the first quarter. On the second spot was Alkeon Capital Management which amassed $91.7 million worth of shares. Moreover, Segantii Capital, Coatue Management, and Kingstown Capital Management were also bullish on Tencent Music Entertainment Group (NYSE:TME), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Tencent Music Entertainment Group (NYSE:TME) has witnessed bearish sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of funds that decided to sell off their full holdings in the third quarter. At the top of the heap, Daniel Sundheim's D1 Capital Partners dropped the biggest stake of all the hedgies tracked by Insider Monkey, comprising about $23 million in stock, and Jonathan Barrett and Paul Segal's Luminus Management was right behind this move, as the fund said goodbye to about $13.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 5 funds in the third quarter.
Let's now review hedge fund activity in other stocks similar to Tencent Music Entertainment Group (NYSE:TME). We will take a look at BT Group plc (NYSE:BT), Xcel Energy Inc (NASDAQ:XEL), Canadian Pacific Railway Limited (NYSE:CP), and Paychex, Inc. (NASDAQ:PAYX). This group of stocks' market caps are similar to TME's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BT,14,39409,5 XEL,16,527326,-5 CP,30,1974726,-10 PAYX,21,808401,-9 Average,20.25,837466,-4.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $837 million. That figure was $424 million in TME's case. Canadian Pacific Railway Limited (NYSE:CP) is the most popular stock in this table. On the other hand BT Group plc (NYSE:BT) is the least popular one with only 14 bullish hedge fund positions. Tencent Music Entertainment Group (NYSE:TME) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately TME wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TME investors were disappointed as the stock returned -25.4% during the same time period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.