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Did Hedge Funds Make The Right Call On Bright Horizons Family Solutions Inc (BFAM) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtBright Horizons Family Solutions Inc (NYSE:BFAM) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Bright Horizons Family Solutions Inc (NYSE:BFAM) investors should be aware of a decrease in hedge fund sentiment of late. Our calculations also showed that BFAM isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the fresh hedge fund action surrounding Bright Horizons Family Solutions Inc (NYSE:BFAM).

What does smart money think about Bright Horizons Family Solutions Inc (NYSE:BFAM)?

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from the fourth quarter of 2019. On the other hand, there were a total of 18 hedge funds with a bullish position in BFAM a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Robert Joseph Caruso’s Select Equity Group has the number one position in Bright Horizons Family Solutions Inc (NYSE:BFAM), worth close to $113.6 million, comprising 0.8% of its total 13F portfolio. The second most bullish fund manager is Pelham Capital, led by Ross Turner, holding a $50.6 million position; the fund has 7.3% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism comprise Paul Marshall and Ian Wace’s Marshall Wace LLP, D. E. Shaw’s D E Shaw and Renaissance Technologies. In terms of the portfolio weights assigned to each position Pelham Capital allocated the biggest weight to Bright Horizons Family Solutions Inc (NYSE:BFAM), around 7.32% of its 13F portfolio. Bishop Rock Capital is also relatively very bullish on the stock, earmarking 1.5 percent of its 13F equity portfolio to BFAM.

Seeing as Bright Horizons Family Solutions Inc (NYSE:BFAM) has faced falling interest from the smart money, we can see that there lies a certain “tier” of fund managers who were dropping their entire stakes in the first quarter. Intriguingly, Ken Griffin’s Citadel Investment Group cut the largest stake of the 750 funds followed by Insider Monkey, comprising close to $21.1 million in stock, and Robert Pitts’s Steadfast Capital Management was right behind this move, as the fund cut about $6.2 million worth. These moves are interesting, as total hedge fund interest fell by 7 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Bright Horizons Family Solutions Inc (NYSE:BFAM) but similarly valued. These stocks are Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM), Amedisys Inc (NASDAQ:AMED), The Stars Group Inc. (NASDAQ:TSG), and TIM Participacoes SA (NYSE:TSU). All of these stocks’ market caps are closest to BFAM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SQM 10 53846 -3
AMED 20 244124 -2
TSG 34 1097115 -11
TSU 11 154487 0
Average 18.75 387393 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $387 million. That figure was $262 million in BFAM’s case. The Stars Group Inc. (NASDAQ:TSG) is the most popular stock in this table. On the other hand Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) is the least popular one with only 10 bullish hedge fund positions. Bright Horizons Family Solutions Inc (NYSE:BFAM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately BFAM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on BFAM were disappointed as the stock returned 14.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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