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Did Hedge Funds Drop The Ball On Chegg Inc (CHGG) ?

“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 Chegg Inc (NYSE:CHGG) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Is Chegg Inc (NYSE:CHGG) a buy here? Prominent investors are becoming more confident. The number of long hedge fund bets rose by 6 in recent months. Our calculations also showed that CHGG 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.

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.

Paul Reeder PAR Capital Management

Paul Reeder of PAR Capital 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 take a look at the key hedge fund action surrounding Chegg Inc (NYSE:CHGG).

How are hedge funds trading Chegg Inc (NYSE:CHGG)?

Heading into the fourth quarter of 2019, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 23% from the second quarter of 2019. On the other hand, there were a total of 21 hedge funds with a bullish position in CHGG a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

CHGG_dec2019

When looking at the institutional investors followed by Insider Monkey, Daniel Patrick Gibson’s Sylebra Capital Management has the biggest position in Chegg Inc (NYSE:CHGG), worth close to $104.3 million, accounting for 4.6% of its total 13F portfolio. The second largest stake is held by Citadel Investment Group, managed by Ken Griffin, which holds a $30.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other peers that are bullish consist of James Crichton’s Hitchwood Capital Management, David E. Shaw’s D E Shaw and Brian Ashford-Russell and Tim Woolley’s Polar Capital. In terms of the portfolio weights assigned to each position Act II Capital allocated the biggest weight to Chegg Inc (NYSE:CHGG), around 8.62% of its portfolio. Selkirk Management is also relatively very bullish on the stock, designating 5.46 percent of its 13F equity portfolio to CHGG.

Now, key money managers have jumped into Chegg Inc (NYSE:CHGG) headfirst. Black-and-White Capital, managed by Seth Wunder, created the largest position in Chegg Inc (NYSE:CHGG). Black-and-White Capital had $6 million invested in the company at the end of the quarter. Paul Reeder’s PAR Capital Management also initiated a $1.5 million position during the quarter. The other funds with brand new CHGG positions are Franklin Parlamis’s Aequim Alternative Investments, Renee Yao’s Neo Ivy Capital, and Minhua Zhang’s Weld Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Chegg Inc (NYSE:CHGG) but similarly valued. We will take a look at LivaNova PLC (NASDAQ:LIVN), Neogen Corporation (NASDAQ:NEOG), National Health Investors Inc (NYSE:NHI), and First Hawaiian, Inc. (NASDAQ:FHB). This group of stocks’ market valuations are similar to CHGG’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LIVN 13 153754 -3
NEOG 13 24715 1
NHI 15 131310 2
FHB 18 208814 -3
Average 14.75 129648 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $130 million. That figure was $337 million in CHGG’s case. First Hawaiian, Inc. (NASDAQ:FHB) is the most popular stock in this table. On the other hand LivaNova PLC (NASDAQ:LIVN) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Chegg Inc (NYSE:CHGG) is more popular among hedge funds. 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. Hedge funds were also right about betting on CHGG as the stock returned 29.4% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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