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Were Hedge Funds Right About Avoiding Harley-Davidson, Inc. (HOG)?

Nina Todic

There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don't cover. Because of Carl Icahn and other elite funds' exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze Harley-Davidson, Inc. (NYSE:HOG).

Harley-Davidson, Inc. (NYSE:HOG) has experienced a decrease in support from the world's most elite money managers lately. Our calculations also showed that HOG isn't among the 30 most popular stocks among hedge funds.

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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Noam Gottesman GLG Partners

Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a glance at the key hedge fund action encompassing Harley-Davidson, Inc. (NYSE:HOG).

What have hedge funds been doing with Harley-Davidson, Inc. (NYSE:HOG)?

At Q2's end, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in HOG a year ago. With the smart money's sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

No of Hedge Funds with HOG Positions

Among these funds, Impala Asset Management held the most valuable stake in Harley-Davidson, Inc. (NYSE:HOG), which was worth $22.9 million at the end of the second quarter. On the second spot was Citadel Investment Group which amassed $9 million worth of shares. Moreover, Citadel Investment Group, Balyasny Asset Management, and GLG Partners were also bullish on Harley-Davidson, Inc. (NYSE:HOG), allocating a large percentage of their portfolios to this stock.

Judging by the fact that Harley-Davidson, Inc. (NYSE:HOG) has faced bearish sentiment from the entirety of the hedge funds we track, we can see that there lies a certain "tier" of hedge funds who sold off their full holdings heading into Q3. It's worth mentioning that Steve Cohen's Point72 Asset Management dropped the largest investment of all the hedgies followed by Insider Monkey, comprising about $10.7 million in stock. Renaissance Technologies, also cut its stock, about $8.3 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds heading into Q3.

Let's also examine hedge fund activity in other stocks similar to Harley-Davidson, Inc. (NYSE:HOG). These stocks are Healthcare Trust Of America Inc (NYSE:HTA), The Howard Hughes Corporation (NYSE:HHC), Allison Transmission Holdings Inc (NYSE:ALSN), and IAA, Inc. (NYSE:IAA). This group of stocks' market values are similar to HOG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HTA,13,405532,-6 HHC,26,551404,4 ALSN,25,894810,-3 IAA,42,908956,42 Average,26.5,690176,9.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $690 million. That figure was $50 million in HOG's case. IAA, Inc. (NYSE:IAA) is the most popular stock in this table. On the other hand Healthcare Trust Of America Inc (NYSE:HTA) is the least popular one with only 13 bullish hedge fund positions. Harley-Davidson, Inc. (NYSE:HOG) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately HOG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); HOG investors were disappointed as the stock returned 1.4% during the third quarter 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 (see the video below) among hedge funds as many of these stocks already outperformed the market so far in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Disclosure: None. This article was originally published at Insider Monkey.

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