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Did Hedge Funds Make The Right Call On Commscope Holding Company Inc (COMM) ?

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 Commscope Holding Company Inc (NASDAQ:COMM) and determine whether hedge funds had an edge regarding this stock.

Is Commscope Holding Company Inc (NASDAQ:COMM) a healthy stock for your portfolio? The smart money was becoming less hopeful. The number of long hedge fund positions dropped by 3 recently. Our calculations also showed that COMM 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Charles Davidson - Wexford Capital

Charles Davidson of Wexford 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. Now we’re going to view the fresh hedge fund action surrounding Commscope Holding Company Inc (NASDAQ:COMM).

How have hedgies been trading Commscope Holding Company Inc (NASDAQ:COMM)?

At the end of the first quarter, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in COMM a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

The largest stake in Commscope Holding Company Inc (NASDAQ:COMM) was held by Maverick Capital, which reported holding $176.1 million worth of stock at the end of September. It was followed by FPR Partners with a $150.7 million position. Other investors bullish on the company included Lyrical Asset Management, Adage Capital Management, and Levin Easterly Partners. In terms of the portfolio weights assigned to each position Shelter Haven Capital Management allocated the biggest weight to Commscope Holding Company Inc (NASDAQ:COMM), around 13.1% of its 13F portfolio. FPR Partners is also relatively very bullish on the stock, earmarking 6.2 percent of its 13F equity portfolio to COMM.

Judging by the fact that Commscope Holding Company Inc (NASDAQ:COMM) has experienced falling interest from hedge fund managers, it’s safe to say that there was a specific group of money managers that elected to cut their entire stakes heading into Q4. It’s worth mentioning that David Brown’s Hawk Ridge Management sold off the largest stake of the 750 funds tracked by Insider Monkey, worth close to $41.2 million in stock. Israel Englander’s fund, Millennium Management, also dropped its stock, about $5.5 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 3 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Commscope Holding Company Inc (NASDAQ:COMM) but similarly valued. These stocks are Healthcare Services Group, Inc. (NASDAQ:HCSG), Ballard Power Systems Inc. (NASDAQ:BLDP), KB Home (NYSE:KBH), and Applied Industrial Technologies Inc (NYSE:AIT). This group of stocks’ market caps match COMM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HCSG 20 87235 2
BLDP 10 21232 4
KBH 25 291267 -4
AIT 14 35993 -8
Average 17.25 108932 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $109 million. That figure was $597 million in COMM’s case. KB Home (NYSE:KBH) is the most popular stock in this table. On the other hand Ballard Power Systems Inc. (NASDAQ:BLDP) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Commscope Holding Company Inc (NASDAQ:COMM) 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 COMM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on COMM were disappointed as the stock returned -8.6% 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.