U.S. Markets closed

Were Hedge Funds Right About Piling Into Extended Stay America Inc (STAY)

Abigail Fisher

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 Extended Stay America Inc (NASDAQ:STAY).

Extended Stay America Inc (NASDAQ:STAY) shareholders have witnessed an increase in activity from the world's largest hedge funds lately. STAY was in 32 hedge funds' portfolios at the end of December. There were 30 hedge funds in our database with STAY holdings at the end of the previous quarter. Our calculations also showed that STAY 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 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 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.

Christian Leone Luxor Capital

Let's analyze the new hedge fund action encompassing Extended Stay America Inc (NASDAQ:STAY).

What have hedge funds been doing with Extended Stay America Inc (NASDAQ:STAY)?

At Q4's end, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards STAY over the last 14 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

STAY_apr2019

According to Insider Monkey's hedge fund database, Christian Leone's Luxor Capital Group has the largest position in Extended Stay America Inc (NASDAQ:STAY), worth close to $63 million, corresponding to 2.3% of its total 13F portfolio. The second largest stake is held by Jeffrey Furber of AEW Capital Management, with a $46.3 million position; 1.5% of its 13F portfolio is allocated to the stock. Some other professional money managers that hold long positions encompass Amy Minella's Cardinal Capital, Cliff Asness's AQR Capital Management and Ken Griffin's Citadel Investment Group.

With a general bullishness amongst the heavyweights, specific money managers have been driving this bullishness. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, initiated the largest position in Extended Stay America Inc (NASDAQ:STAY). Marshall Wace LLP had $15.9 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also initiated a $13.9 million position during the quarter. The other funds with brand new STAY positions are Paul Tudor Jones's Tudor Investment Corp, Mike Vranos's Ellington, and Steve Cohen's Point72 Asset Management.

Let's go over hedge fund activity in other stocks similar to Extended Stay America Inc (NASDAQ:STAY). These stocks are Nomad Foods Limited (NYSE:NOMD), GDS Holdings Limited (NASDAQ:GDS), Yelp Inc (NYSE:YELP), and Evercore Inc. (NYSE:EVR). This group of stocks' market values match STAY's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NOMD,31,251607,-3 GDS,25,426393,-1 YELP,24,577668,-6 EVR,24,303273,2 Average,26,389735,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $390 million. That figure was $405 million in STAY's case. Nomad Foods Limited (NYSE:NOMD) is the most popular stock in this table. On the other hand Yelp Inc (NYSE:YELP) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Extended Stay America Inc (NASDAQ:STAY) 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 STAY, though not to the same extent, as the stock returned 18% and outperformed the market as well.

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

Related Content