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Were Hedge Funds Right About Dumping Selling Conn’s, Inc. (CONN) ?

Reymerlyn Martin

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 15 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 19.7% during the first 2.5 months of 2019 (vs. 13.1% gain for SPY), with 93% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Conn's, Inc. (NASDAQ:CONN).

Conn's, Inc. (NASDAQ:CONN) was in 14 hedge funds' portfolios at the end of December. CONN investors should pay attention to a decrease in hedge fund sentiment in recent months. There were 19 hedge funds in our database with CONN positions at the end of the previous quarter. Our calculations also showed that CONN isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? 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 32 percentage points since May 2014 through March 12, 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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Reeder PAR Capital Management

Let's check out the key hedge fund action encompassing Conn's, Inc. (NASDAQ:CONN).

How have hedgies been trading Conn's, Inc. (NASDAQ:CONN)?

At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -26% from the second quarter of 2018. On the other hand, there were a total of 16 hedge funds with a bullish position in CONN a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

CONN_may2019

More specifically, PAR Capital Management was the largest shareholder of Conn's, Inc. (NASDAQ:CONN), with a stake worth $56 million reported as of the end of December. Trailing PAR Capital Management was Anchorage Advisors, which amassed a stake valued at $54.7 million. Marshall Wace LLP, Portolan Capital Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Conn's, Inc. (NASDAQ:CONN) has experienced falling interest from the smart money, it's safe to say that there were a few hedgies that decided to sell off their entire stakes by the end of the third quarter. Intriguingly, Richard Driehaus's Driehaus Capital sold off the biggest position of the 700 funds followed by Insider Monkey, comprising an estimated $3.8 million in stock, and Benjamin A. Smith's Laurion Capital Management was right behind this move, as the fund sold off about $1.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 5 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to Conn's, Inc. (NASDAQ:CONN). These stocks are Cresud S.A.C.I.F. y A. (NASDAQ:CRESY), Urstadt Biddle Properties Inc. (NYSE:UBP), Oaktree Specialty Lending Corporation (NASDAQ:OCSL), and Eros International plc (NYSE:EROS). This group of stocks' market valuations are similar to CONN's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CRESY,7,26789,2 UBP,2,11884,0 OCSL,12,55436,-2 EROS,4,7995,1 Average,6.25,25526,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $151 million in CONN's case. Oaktree Specialty Lending Corporation (NASDAQ:OCSL) is the most popular stock in this table. On the other hand Urstadt Biddle Properties Inc. (NYSE:UBP) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Conn's, Inc. (NASDAQ:CONN) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on CONN as the stock returned 28.6% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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