How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cogent Communications Holdings Inc. (NASDAQ:CCOI) and determine whether hedge funds had an edge regarding this stock.
Cogent Communications Holdings Inc. (NASDAQ:CCOI) investors should pay attention to an increase in activity from the world’s largest hedge funds in recent months. CCOI was in 27 hedge funds’ portfolios at the end of March. There were 24 hedge funds in our database with CCOI positions at the end of the previous quarter. Our calculations also showed that CCOI 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.
Stuart Zimmer of Zimmer 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. Now we’re going to check out the new hedge fund action encompassing Cogent Communications Holdings Inc. (NASDAQ:CCOI).
How have hedgies been trading Cogent Communications Holdings Inc. (NASDAQ:CCOI)?
Heading into the second quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the fourth quarter of 2019. On the other hand, there were a total of 19 hedge funds with a bullish position in CCOI a year ago. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Cogent Communications Holdings Inc. (NASDAQ:CCOI), which was worth $292.4 million at the end of the third quarter. On the second spot was MIG Capital which amassed $40.3 million worth of shares. Zimmer Partners, GLG Partners, and Intrinsic Edge Capital 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 MIG Capital allocated the biggest weight to Cogent Communications Holdings Inc. (NASDAQ:CCOI), around 4.74% of its 13F portfolio. Intrinsic Edge Capital is also relatively very bullish on the stock, earmarking 2.11 percent of its 13F equity portfolio to CCOI.
As one would reasonably expect, specific money managers were breaking ground themselves. SG Capital Management, managed by Ken Grossman and Glen Schneider, created the biggest position in Cogent Communications Holdings Inc. (NASDAQ:CCOI). SG Capital Management had $4.2 million invested in the company at the end of the quarter. Peter Algert and Kevin Coldiron’s Algert Coldiron Investors also made a $3.1 million investment in the stock during the quarter. The other funds with brand new CCOI positions are Greg Eisner’s Engineers Gate Manager, Lee Ainslie’s Maverick Capital, and Bruce Kovner’s Caxton Associates LP.
Let’s also examine hedge fund activity in other stocks similar to Cogent Communications Holdings Inc. (NASDAQ:CCOI). These stocks are Tetra Tech, Inc. (NASDAQ:TTEK), Plains All American Pipeline, L.P. (NYSE:PAA), Allison Transmission Holdings Inc (NYSE:ALSN), and Cirrus Logic, Inc. (NASDAQ:CRUS). This group of stocks’ market caps resemble CCOI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TTEK | 21 | 115608 | -2 |
| PAA | 8 | 44850 | -4 |
| ALSN | 27 | 404743 | -6 |
| CRUS | 28 | 286330 | 3 |
| Average | 21 | 212883 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $213 million. That figure was $454 million in CCOI’s case. Cirrus Logic, Inc. (NASDAQ:CRUS) is the most popular stock in this table. On the other hand Plains All American Pipeline, L.P. (NYSE:PAA) is the least popular one with only 8 bullish hedge fund positions. Cogent Communications Holdings Inc. (NASDAQ:CCOI) 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 CCOI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CCOI were disappointed as the stock returned -4.8% 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.
