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Carlyle Group LP (CG): Are Hedge Funds Right About This Stock?

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Carlyle Group LP (NASDAQ:CG) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 7 hedge funds’ portfolios at the end of September. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Service Corporation International (NYSE:SCI), Credit Acceptance Corporation (NASDAQ:CACC), and LINE Corporation (NYSE:LN) to gather more data points. Our calculations also showed that CG isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? 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.

Tom Gayner

Tom Gayner of Markel Gayner Asset 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. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the recent hedge fund action regarding Carlyle Group LP (NASDAQ:CG).

How have hedgies been trading Carlyle Group LP (NASDAQ:CG)?

At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. By comparison, 10 hedge funds held shares or bullish call options in CG a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

The largest stake in Carlyle Group LP (NASDAQ:CG) was held by Alkeon Capital Management, which reported holding $131.4 million worth of stock at the end of September. It was followed by Markel Gayner Asset Management with a $30.1 million position. Other investors bullish on the company included LMR Partners, Miller Value Partners, and Royce & Associates. In terms of the portfolio weights assigned to each position LMR Partners allocated the biggest weight to Carlyle Group LP (NASDAQ:CG), around 0.76% of its 13F portfolio. Miller Value Partners is also relatively very bullish on the stock, dishing out 0.6 percent of its 13F equity portfolio to CG.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: P.A.W. Capital Partners. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was LMR Partners).

Let’s now take a look at hedge fund activity in other stocks similar to Carlyle Group LP (NASDAQ:CG). These stocks are Service Corporation International (NYSE:SCI), Credit Acceptance Corporation (NASDAQ:CACC), LINE Corporation (NYSE:LN), and Store Capital Corporation (NYSE:STOR). This group of stocks’ market caps match CG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SCI 20 352282 5
CACC 23 1026982 -4
LN 7 105831 -2
STOR 18 979106 -4
Average 17 616050 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $616 million. That figure was $202 million in CG’s case. Credit Acceptance Corporation (NASDAQ:CACC) is the most popular stock in this table. On the other hand LINE Corporation (NYSE:LN) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Carlyle Group LP (NASDAQ:CG) is even less popular than LN. Hedge funds clearly dropped the ball on CG as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on CG as the stock returned 17.9% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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

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