How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding CoStar Group Inc (NASDAQ:CSGP) and determine whether hedge funds had an edge regarding this stock.
Is CoStar Group Inc (NASDAQ:CSGP) undervalued? Prominent investors were in a pessimistic mood. The number of bullish hedge fund positions retreated by 4 in recent months. Our calculations also showed that CSGP 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). 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_670980" align="aligncenter" width="399"] Gabriel Plotkin of Melvin Capital Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. 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 gold prices. So, we are checking out this junior gold mining stock. 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. With all of this in mind we're going to check out the fresh hedge fund action surrounding CoStar Group Inc (NASDAQ:CSGP).
How have hedgies been trading CoStar Group Inc (NASDAQ:CSGP)?
Heading into the second quarter of 2020, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the previous quarter. On the other hand, there were a total of 32 hedge funds with a bullish position in CSGP 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.
Of the funds tracked by Insider Monkey, Robert Joseph Caruso's Select Equity Group has the most valuable position in CoStar Group Inc (NASDAQ:CSGP), worth close to $360 million, amounting to 2.5% of its total 13F portfolio. Coming in second is Melvin Capital Management, led by Gabriel Plotkin, holding a $357.6 million position; 2.9% of its 13F portfolio is allocated to the stock. Remaining peers that are bullish consist of Charles Akre's Akre Capital Management, Brian Bares's Bares Capital Management and Nancy Zevenbergen's Zevenbergen Capital Investments. In terms of the portfolio weights assigned to each position Wildcat Capital Management allocated the biggest weight to CoStar Group Inc (NASDAQ:CSGP), around 23.78% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, earmarking 7.99 percent of its 13F equity portfolio to CSGP.
Since CoStar Group Inc (NASDAQ:CSGP) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of fund managers that decided to sell off their full holdings by the end of the first quarter. It's worth mentioning that Leon Shaulov's Maplelane Capital sold off the biggest stake of the "upper crust" of funds watched by Insider Monkey, valued at an estimated $23.9 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also dumped its stock, about $14 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 4 funds by the end of the first quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as CoStar Group Inc (NASDAQ:CSGP) but similarly valued. These stocks are V.F. Corporation (NYSE:VFC), ResMed Inc. (NYSE:RMD), PACCAR Inc (NASDAQ:PCAR), and Tyson Foods, Inc. (NYSE:TSN). All of these stocks' market caps resemble CSGP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VFC,19,171262,-10 RMD,33,167543,12 PCAR,38,486230,2 TSN,41,906465,-17 Average,32.75,432875,-3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 32.75 hedge funds with bullish positions and the average amount invested in these stocks was $433 million. That figure was $1690 million in CSGP's case. Tyson Foods, Inc. (NYSE:TSN) is the most popular stock in this table. On the other hand V.F. Corporation (NYSE:VFC) is the least popular one with only 19 bullish hedge fund positions. CoStar Group Inc (NASDAQ:CSGP) 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 CSGP, though not to the same extent, as the stock returned 21% during the second quarter and outperformed the market as well.
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Disclosure: None. This article was originally published at Insider Monkey.