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Did Hedge Funds Make The Right Call On Chegg Inc (CHGG ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at 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. 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 we look at how hedge funds traded Chegg Inc (NYSE:CHGG) and determine whether the smart money was really smart about this stock.

Is Chegg Inc (NYSE:CHGG) a buy, sell, or hold? Money managers were turning less bullish. The number of bullish hedge fund bets fell by 5 recently. Our calculations also showed that CHGG 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.

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 S&P 500 ETFs by 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.

Matthew Hulsizer PEAK6 Capital

Matthew Hulsizer of PEAK6 Capital

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 recent hedge fund action regarding Chegg Inc (NYSE:CHGG).

Hedge fund activity in Chegg Inc (NYSE:CHGG)

At Q1’s end, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. By comparison, 36 hedge funds held shares or bullish call options in CHGG a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

More specifically, Sylebra Capital Management was the largest shareholder of Chegg Inc (NYSE:CHGG), with a stake worth $113.1 million reported as of the end of September. Trailing Sylebra Capital Management was Citadel Investment Group, which amassed a stake valued at $37.3 million. Greenhouse Funds, Zevenbergen Capital Investments, and D E Shaw 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 Act II Capital allocated the biggest weight to Chegg Inc (NYSE:CHGG), around 14.63% of its 13F portfolio. Greenhouse Funds is also relatively very bullish on the stock, earmarking 8.12 percent of its 13F equity portfolio to CHGG.

Due to the fact that Chegg Inc (NYSE:CHGG) has faced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of hedge funds that decided to sell off their full holdings by the end of the first quarter. Interestingly, Brian Ashford-Russell and Tim Woolley’s Polar Capital dropped the largest position of the “upper crust” of funds watched by Insider Monkey, worth an estimated $40 million in stock, and James Crichton’s Hitchwood Capital Management was right behind this move, as the fund dumped about $37.9 million worth. These transactions are important to note, as total hedge fund interest fell by 5 funds by the end of the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Chegg Inc (NYSE:CHGG) but similarly valued. These stocks are Robert Half International Inc. (NYSE:RHI), Flowers Foods, Inc. (NYSE:FLO), National Instruments Corporation (NASDAQ:NATI), and MDU Resources Group Inc (NYSE:MDU). This group of stocks’ market values resemble CHGG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RHI 26 247265 3
FLO 27 227639 7
NATI 29 706256 -1
MDU 25 183156 -5
Average 26.75 341079 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $341 million. That figure was $303 million in CHGG’s case. National Instruments Corporation (NASDAQ:NATI) is the most popular stock in this table. On the other hand MDU Resources Group Inc (NYSE:MDU) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks Chegg Inc (NYSE:CHGG) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on CHGG as the stock returned 88% in Q2 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.

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