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Did Hedge Funds Drop The Ball On Cannae Holdings, Inc. (CNNE)?

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That’s why we believe it would be worthwhile to take a look at the hedge fund sentiment on Cannae Holdings, Inc. (NYSE:CNNE) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Cannae Holdings, Inc. (NYSE:CNNE) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 19 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 Federal Signal Corporation (NYSE:FSS), Asbury Automotive Group, Inc. (NYSE:ABG), and United States Steel Corporation (NYSE:X) to gather more data points. Our calculations also showed that CNNE 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.

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 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 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 stocks that are in our short portfolio.

Steven Cohen of Point72 Asset Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to go over the key hedge fund action surrounding Cannae Holdings, Inc. (NYSE:CNNE).

Hedge fund activity in Cannae Holdings, Inc. (NYSE:CNNE)

At Q3’s end, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CNNE over the last 17 quarters. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Among these funds, Nitorum Capital held the most valuable stake in Cannae Holdings, Inc. (NYSE:CNNE), which was worth $104.5 million at the end of the third quarter. On the second spot was Lomas Capital Management which amassed $39.4 million worth of shares. Millennium Management, Ancora Advisors, and Asturias Capital 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 Asturias Capital allocated the biggest weight to Cannae Holdings, Inc. (NYSE:CNNE), around 6.86% of its 13F portfolio. Nitorum Capital is also relatively very bullish on the stock, earmarking 6.08 percent of its 13F equity portfolio to CNNE.

Seeing as Cannae Holdings, Inc. (NYSE:CNNE) has faced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of money managers who sold off their full holdings in the third quarter. Intriguingly, Isaac Corre’s Governors Lane cut the largest position of the 750 funds followed by Insider Monkey, worth about $15 million in stock. Sean Murphy’s fund, Game Creek Capital, also said goodbye to its stock, about $1.2 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Cannae Holdings, Inc. (NYSE:CNNE) but similarly valued. These stocks are Federal Signal Corporation (NYSE:FSS), Asbury Automotive Group, Inc. (NYSE:ABG), United States Steel Corporation (NYSE:X), and Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS). All of these stocks’ market caps are similar to CNNE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FSS 19 77508 -1
ABG 21 287252 4
X 20 169213 1
KTOS 21 76636 3
Average 20.25 152652 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $153 million. That figure was $242 million in CNNE’s case. Asbury Automotive Group, Inc. (NYSE:ABG) is the most popular stock in this table. On the other hand Federal Signal Corporation (NYSE:FSS) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Cannae Holdings, Inc. (NYSE:CNNE) is even less popular than FSS. Hedge funds clearly dropped the ball on CNNE 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 CNNE as the stock returned 36.5% 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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