Did Hedge Funds Drop The Ball On Gannett Co., Inc. (GCI) ?

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% 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 24.4% during the first 9 months of 2019 and outperformed the broader market benchmark by 4 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Gannett Co., Inc. (NYSE:GCI) has experienced a decrease in hedge fund sentiment lately. GCI was in 14 hedge funds’ portfolios at the end of the second quarter of 2019. There were 16 hedge funds in our database with GCI holdings at the end of the previous quarter. Our calculations also showed that GCI isn’t among the 30 most popular stocks among hedge funds (see the video below).
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’ 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.

Chuck Royce

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. We’re going to analyze the latest hedge fund action encompassing Gannett Co., Inc. (NYSE:GCI).

How are hedge funds trading Gannett Co., Inc. (NYSE:GCI)?

At the end of the second quarter, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. By comparison, 19 hedge funds held shares or bullish call options in GCI a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

No of Hedge Funds with GCI Positions

The largest stake in Gannett Co., Inc. (NYSE:GCI) was held by HG Vora Capital Management, which reported holding $64.1 million worth of stock at the end of March. It was followed by Alden Global Capital with a $35.2 million position. Other investors bullish on the company included Alta Fundamental Advisers, Two Sigma Advisors, and Royce & Associates.

Judging by the fact that Gannett Co., Inc. (NYSE:GCI) has experienced declining sentiment from hedge fund managers, it’s safe to say that there exists a select few hedgies that slashed their positions entirely heading into Q3. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the biggest stake of the 750 funds watched by Insider Monkey, totaling close to $7.8 million in call options. Steve Pigott’s fund, Fort Baker Capital Management, also dropped its call options, about $2.7 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 2 funds heading into Q3.

Let’s check out hedge fund activity in other stocks similar to Gannett Co., Inc. (NYSE:GCI). We will take a look at Standex International Corporation (NYSE:SXI), MAG Silver Corp. (NYSE:MAG), Pacific Drilling SA (NYSE:PACD), and TCG BDC, Inc. (NASDAQ:CGBD). All of these stocks’ market caps are similar to GCI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SXI 9 32228 -2
MAG 9 25008 -2
PACD 9 669854 3
CGBD 8 30678 -4
Average 8.75 189442 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $189 million. That figure was $121 million in GCI’s case. Standex International Corporation (NYSE:SXI) is the most popular stock in this table. On the other hand TCG BDC, Inc. (NASDAQ:CGBD) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Gannett Co., Inc. (NYSE:GCI) is more popular among hedge funds. 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. Hedge funds were also right about betting on GCI as the stock returned 33.6% during Q3 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.