We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 835 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about National General Holdings Corp (NASDAQ:NGHC).
Is National General Holdings Corp (NASDAQ:NGHC) ready to rally soon? Prominent investors are getting less optimistic. The number of long hedge fund bets dropped by 1 lately. Our calculations also showed that NGHC isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). NGHC was in 16 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 17 hedge funds in our database with NGHC holdings at the end of the previous quarter.
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' 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 S&P 500 ETFs by 41 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 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.
[caption id="attachment_30621" align="aligncenter" width="400"] Cliff Asness of AQR Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now we're going to review the latest hedge fund action surrounding National General Holdings Corp (NASDAQ:NGHC).
How are hedge funds trading National General Holdings Corp (NASDAQ:NGHC)?
At Q4's end, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NGHC over the last 18 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in National General Holdings Corp (NASDAQ:NGHC) was held by Park West Asset Management, which reported holding $115.3 million worth of stock at the end of September. It was followed by MSDC Management with a $47.8 million position. Other investors bullish on the company included Nut Tree Capital, D E Shaw, and AQR Capital Management. In terms of the portfolio weights assigned to each position Nut Tree Capital allocated the biggest weight to National General Holdings Corp (NASDAQ:NGHC), around 13.8% of its 13F portfolio. MSDC Management is also relatively very bullish on the stock, earmarking 10.52 percent of its 13F equity portfolio to NGHC.
Due to the fact that National General Holdings Corp (NASDAQ:NGHC) has faced falling interest from the smart money, it's easy to see that there were a few fund managers who were dropping their positions entirely by the end of the third quarter. At the top of the heap, Bruce Kovner's Caxton Associates LP said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, comprising an estimated $0.5 million in stock. Minhua Zhang's fund, Weld Capital Management, also sold off its stock, about $0.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 1 funds by the end of the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as National General Holdings Corp (NASDAQ:NGHC) but similarly valued. We will take a look at Belden Inc. (NYSE:BDC), Scientific Games Corp (NASDAQ:SGMS), Avon Products, Inc. (NYSE:AVP), and SeaWorld Entertainment Inc (NYSE:SEAS). All of these stocks' market caps match NGHC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BDC,12,64705,-1 SGMS,33,725702,5 AVP,13,307162,-8 SEAS,39,1283543,4 Average,24.25,595278,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $595 million. That figure was $238 million in NGHC's case. SeaWorld Entertainment Inc (NYSE:SEAS) is the most popular stock in this table. On the other hand Belden Inc. (NYSE:BDC) is the least popular one with only 12 bullish hedge fund positions. National General Holdings Corp (NASDAQ:NGHC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately NGHC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); NGHC investors were disappointed as the stock returned -31.3% during the same time period 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 among hedge funds as most of these stocks already outperformed the market in Q1. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.