Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Yelp Inc (NYSE:YELP).
Yelp Inc (NYSE:YELP) shareholders have witnessed a decrease in enthusiasm from smart money recently. YELP was in 26 hedge funds’ portfolios at the end of the third quarter of 2019. There were 27 hedge funds in our database with YELP positions at the end of the previous quarter. Our calculations also showed that YELP isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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’ 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
David Harding of Winton Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Now let’s check out the new hedge fund action surrounding Yelp Inc (NYSE:YELP).
How have hedgies been trading Yelp Inc (NYSE:YELP)?
Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in YELP over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, D E Shaw was the largest shareholder of Yelp Inc (NYSE:YELP), with a stake worth $125.9 million reported as of the end of September. Trailing D E Shaw was Fisher Asset Management, which amassed a stake valued at $106.8 million. Millennium Management, Goodnow Investment Group, and Tenzing Global Investors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Tenzing Global Investors allocated the biggest weight to Yelp Inc (NYSE:YELP), around 13.62% of its 13F portfolio. Goodnow Investment Group is also relatively very bullish on the stock, designating 3.78 percent of its 13F equity portfolio to YELP.
Judging by the fact that Yelp Inc (NYSE:YELP) has experienced bearish sentiment from the smart money, it’s safe to say that there exists a select few hedge funds who were dropping their full holdings by the end of the third quarter. It’s worth mentioning that Seth Wunder’s Black-and-White Capital dumped the largest position of the “upper crust” of funds tracked by Insider Monkey, worth about $20.5 million in stock. Greg Poole’s fund, Echo Street Capital Management, also dumped its stock, about $11.4 million worth. These transactions are important to note, as total hedge fund interest fell by 1 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks similar to Yelp Inc (NYSE:YELP). We will take a look at Carpenter Technology Corporation (NYSE:CRS), Vishay Intertechnology (NYSE:VSH), Atlantica Yield plc (NASDAQ:AY), and Universal Forest Products, Inc. (NASDAQ:UFPI). This group of stocks’ market values are similar to YELP’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CRS | 13 | 72105 | 1 |
| VSH | 19 | 323885 | 0 |
| AY | 19 | 152882 | 1 |
| UFPI | 20 | 79055 | 3 |
| Average | 17.75 | 156982 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $157 million. That figure was $418 million in YELP’s case. Universal Forest Products, Inc. (NASDAQ:UFPI) is the most popular stock in this table. On the other hand Carpenter Technology Corporation (NYSE:CRS) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Yelp Inc (NYSE:YELP) is more popular among hedge funds. 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. Unfortunately YELP wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on YELP were disappointed as the stock returned -0.5% in 2019 and trailed 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 65 percent of these stocks outperformed the market in 2019.
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.
