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Were Hedge Funds Right About Dumping Canopy Growth Corporation (CGC)?

Nina Todic

Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won't accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

Canopy Growth Corporation (NYSE:CGC) shareholders have witnessed a decrease in support from the world's most elite money managers in recent months. Our calculations also showed that CGC 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ken Griffin CITADEL INVESTMENT GROUP

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 look at the new hedge fund action encompassing Canopy Growth Corporation (NYSE:CGC).

How are hedge funds trading Canopy Growth Corporation (NYSE:CGC)?

Heading into the third quarter of 2019, a total of 4 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from the first quarter of 2019. By comparison, 7 hedge funds held shares or bullish call options in CGC 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.

No of Hedge Funds with CGC Positions

The largest stake in Canopy Growth Corporation (NYSE:CGC) was held by Alkeon Capital Management, which reported holding $80.6 million worth of stock at the end of March. It was followed by Citadel Investment Group with a $22.8 million position. Other investors bullish on the company included OZ Management, Citadel Investment Group, and Rima Senvest Management.

Since Canopy Growth Corporation (NYSE:CGC) has witnessed declining sentiment from the smart money, logic holds that there were a few fund managers that elected to cut their full holdings last quarter. Interestingly, Cliff Asness's AQR Capital Management dropped the biggest investment of all the hedgies tracked by Insider Monkey, totaling about $52.7 million in call options, and OZ Management was right behind this move, as the fund cut about $9.8 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 2 funds last quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Canopy Growth Corporation (NYSE:CGC) but similarly valued. These stocks are W.P. Carey Inc. (NYSE:WPC), TransUnion (NYSE:TRU), Mid-America Apartment Communities, Inc. (NYSE:MAA), and Extra Space Storage, Inc. (NYSE:EXR). This group of stocks' market caps match CGC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WPC,16,41714,3 TRU,30,1002765,1 MAA,13,292955,-8 EXR,20,184908,3 Average,19.75,380586,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $381 million. That figure was $23 million in CGC's case. TransUnion (NYSE:TRU) is the most popular stock in this table. On the other hand Mid-America Apartment Communities, Inc. (NYSE:MAA) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Canopy Growth Corporation (NYSE:CGC) is even less popular than MAA. Hedge funds dodged a bullet by taking a bearish stance towards CGC. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately CGC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CGC investors were disappointed as the stock returned -43.1% 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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