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We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Travelzoo Inc. (NASDAQ:TZOO).
Hedge fund interest in Travelzoo Inc. (NASDAQ:TZOO) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Ovid Therapeutics Inc. (NASDAQ:OVID), Old Point Financial Corporation (NASDAQ:OPOF), and MEI Pharma Inc (NASDAQ:MEIP) to gather more data points. Our calculations also showed that TZOO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
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Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's analyze the recent hedge fund action surrounding Travelzoo Inc. (NASDAQ:TZOO).
How are hedge funds trading Travelzoo Inc. (NASDAQ:TZOO)?
At Q3's end, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TZOO over the last 17 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Osmium Partners, managed by John H Lewis, holds the most valuable position in Travelzoo Inc. (NASDAQ:TZOO). Osmium Partners has a $7.3 million position in the stock, comprising 9.1% of its 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, holding a $6 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that hold long positions contain Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Matthew Hulsizer's PEAK6 Capital Management and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Osmium Partners allocated the biggest weight to Travelzoo Inc. (NASDAQ:TZOO), around 9.12% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to TZOO.
Since Travelzoo Inc. (NASDAQ:TZOO) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of hedgies that elected to cut their entire stakes by the end of the third quarter. Intriguingly, Peter Algert and Kevin Coldiron's Algert Coldiron Investors dumped the largest stake of the "upper crust" of funds monitored by Insider Monkey, worth about $0.3 million in stock, and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital was right behind this move, as the fund said goodbye to about $0 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Travelzoo Inc. (NASDAQ:TZOO) but similarly valued. These stocks are Ovid Therapeutics Inc. (NASDAQ:OVID), Old Point Financial Corporation (NASDAQ:OPOF), MEI Pharma Inc (NASDAQ:MEIP), and Pointer Telocation Limited (NASDAQ:PNTR). This group of stocks' market valuations resemble TZOO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OVID,9,12627,3 OPOF,3,2797,1 MEIP,13,29548,0 PNTR,2,5370,-2 Average,6.75,12586,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $13 million. That figure was $17 million in TZOO's case. MEI Pharma Inc (NASDAQ:MEIP) is the most popular stock in this table. On the other hand Pointer Telocation Limited (NASDAQ:PNTR) is the least popular one with only 2 bullish hedge fund positions. Travelzoo Inc. (NASDAQ:TZOO) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TZOO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on TZOO were disappointed as the stock returned -3.4% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.