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Did Hedge Funds Make The Right Call On CenturyLink, Inc. (CTL) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of CenturyLink, Inc. (NYSE:CTL) based on that data and determine whether they were really smart about the stock.

Hedge fund interest in CenturyLink, Inc. (NYSE:CTL) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare CTL to other stocks including Brown & Brown, Inc. (NYSE:BRO), EPAM Systems Inc (NYSE:EPAM), and Hess Corporation (NYSE:HES) to get a better sense of its popularity.

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.

Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

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. With all of this in mind let’s take a look at the fresh hedge fund action regarding CenturyLink, Inc. (NYSE:CTL).

How are hedge funds trading CenturyLink, Inc. (NYSE:CTL)?

Heading into the second quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. By comparison, 32 hedge funds held shares or bullish call options in CTL a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Is CTL A Good Stock To Buy?

Among these funds, Southeastern Asset Management held the most valuable stake in CenturyLink, Inc. (NYSE:CTL), which was worth $635.7 million at the end of the third quarter. On the second spot was GLG Partners which amassed $34.9 million worth of shares. Arrowstreet Capital, Fairfax Financial Holdings, and Citadel Investment Group 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 Southeastern Asset Management allocated the biggest weight to CenturyLink, Inc. (NYSE:CTL), around 15.12% of its 13F portfolio. Knoll Capital Management is also relatively very bullish on the stock, dishing out 1.95 percent of its 13F equity portfolio to CTL.

Since CenturyLink, Inc. (NYSE:CTL) has experienced declining sentiment from hedge fund managers, logic holds that there lies a certain “tier” of hedgies that slashed their full holdings by the end of the first quarter. At the top of the heap, Israel Englander’s Millennium Management sold off the biggest stake of the “upper crust” of funds tracked by Insider Monkey, valued at close to $29.7 million in stock. Phill Gross and Robert Atchinson’s fund, Adage Capital Management, also cut its stock, about $15 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks similar to CenturyLink, Inc. (NYSE:CTL). We will take a look at Brown & Brown, Inc. (NYSE:BRO), EPAM Systems Inc (NYSE:EPAM), Hess Corporation (NYSE:HES), and Discovery Inc. (NASDAQ:DISCA). All of these stocks’ market caps are similar to CTL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BRO 26 585823 3
EPAM 27 338859 -1
HES 28 253381 -6
DISCA 32 233387 -6
Average 28.25 352863 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $353 million. That figure was $775 million in CTL’s case. Discovery Inc. (NASDAQ:DISCA) is the most popular stock in this table. On the other hand Brown & Brown, Inc. (NYSE:BRO) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks CenturyLink, Inc. (NYSE:CTL) is more popular among hedge funds. 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 and still beat the market by 15.5 percentage points. Unfortunately CTL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CTL were disappointed as the stock returned 8.7% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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