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Were Hedge Funds Right About Flocking Into SLM Corp (SLM) ?

Nina Todic

Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 18.7% compared to 12.1%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.

SLM Corp (NASDAQ:SLM) was in 29 hedge funds' portfolios at the end of March. SLM has seen an increase in hedge fund interest recently. There were 24 hedge funds in our database with SLM positions at the end of the previous quarter. Our calculations also showed that slm 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.

Jeff Ubben VALUEACT CAPITAL

We're going to go over the new hedge fund action surrounding SLM Corp (NASDAQ:SLM).

Hedge fund activity in SLM Corp (NASDAQ:SLM)

At the end of the first quarter, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SLM over the last 15 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with SLM Positions

Among these funds, ValueAct Capital held the most valuable stake in SLM Corp (NASDAQ:SLM), which was worth $388.3 million at the end of the first quarter. On the second spot was Renaissance Technologies which amassed $29.1 million worth of shares. Moreover, Portolan Capital Management, Carlson Capital, and Arrowstreet Capital were also bullish on SLM Corp (NASDAQ:SLM), allocating a large percentage of their portfolios to this stock.

With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Shellback Capital, managed by Doug Gordon, Jon Hilsabeck and Don Jabro, established the biggest position in SLM Corp (NASDAQ:SLM). Shellback Capital had $10.1 million invested in the company at the end of the quarter. Andrew Feldstein and Stephen Siderow's Blue Mountain Capital also made a $3.3 million investment in the stock during the quarter. The other funds with brand new SLM positions are Dmitry Balyasny's Balyasny Asset Management, Noam Gottesman's GLG Partners, and Joel Greenblatt's Gotham Asset Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as SLM Corp (NASDAQ:SLM) but similarly valued. We will take a look at Choice Hotels International, Inc. (NYSE:CHH), Hospitality Properties Trust (NASDAQ:HPT), Spark Therapeutics Inc (NASDAQ:ONCE), and Western Alliance Bancorporation (NYSE:WAL). This group of stocks' market valuations match SLM's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHH,18,272313,-1 HPT,11,68312,-5 ONCE,36,1167154,21 WAL,28,288568,0 Average,23.25,449087,3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $449 million. That figure was $576 million in SLM's case. Spark Therapeutics Inc (NASDAQ:ONCE) is the most popular stock in this table. On the other hand Hospitality Properties Trust (NASDAQ:HPT) is the least popular one with only 11 bullish hedge fund positions. SLM Corp (NASDAQ:SLM) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on SLM, though not to the same extent, as the stock returned -1.1% during the same time frame and outperformed the market as well.

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

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