Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.
Is Zebra Technologies Corporation (NASDAQ:ZBRA) a buy here? The smart money is getting less optimistic. The number of bullish hedge fund positions shrunk by 15 recently. Our calculations also showed that ZBRA isn't among the 30 most popular stocks among hedge funds (view the video below). ZBRA was in 20 hedge funds' portfolios at the end of June. There were 35 hedge funds in our database with ZBRA positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, 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 review the new hedge fund action encompassing Zebra Technologies Corporation (NASDAQ:ZBRA).
What have hedge funds been doing with Zebra Technologies Corporation (NASDAQ:ZBRA)?
At Q2's end, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -43% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ZBRA over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
The largest stake in Zebra Technologies Corporation (NASDAQ:ZBRA) was held by Ariel Investments, which reported holding $146.4 million worth of stock at the end of March. It was followed by Columbus Circle Investors with a $128.9 million position. Other investors bullish on the company included Makaira Partners, Goodnow Investment Group, and AQR Capital Management.
Because Zebra Technologies Corporation (NASDAQ:ZBRA) has witnessed a decline in interest from the entirety of the hedge funds we track, it's safe to say that there lies a certain "tier" of hedgies that elected to cut their full holdings last quarter. At the top of the heap, Ken Heebner's Capital Growth Management dumped the largest stake of the 750 funds followed by Insider Monkey, totaling close to $71.1 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund dumped about $53.4 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 15 funds last quarter.
Let's now take a look at hedge fund activity in other stocks similar to Zebra Technologies Corporation (NASDAQ:ZBRA). We will take a look at C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), Regency Centers Corp (NASDAQ:REG), Open Text Corporation (NASDAQ:OTEX), and SVB Financial Group (NASDAQ:SIVB). This group of stocks' market values match ZBRA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHRW,20,351182,-10 REG,12,319525,-5 OTEX,16,778997,-6 SIVB,26,484420,-3 Average,18.5,483531,-6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $484 million. That figure was $636 million in ZBRA's case. SVB Financial Group (NASDAQ:SIVB) is the most popular stock in this table. On the other hand Regency Centers Corp (NASDAQ:REG) is the least popular one with only 12 bullish hedge fund positions. Zebra Technologies Corporation (NASDAQ:ZBRA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately ZBRA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ZBRA were disappointed as the stock returned -1.5% 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 among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.