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Did Hedge Funds Make The Right Call On GameStop Corp. (GME) ?

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 thoughtGameStop Corp. (NYSE:GME) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is GameStop Corp. (NYSE:GME) a buy right now? The best stock pickers were taking a bearish view. The number of bullish hedge fund bets decreased by 3 in recent months. Our calculations also showed that GME 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.

Michael Burry Scion Capital

Michael Burry of Scion Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we’re going to take a peek at the key hedge fund action surrounding GameStop Corp. (NYSE:GME).

Hedge fund activity in GameStop Corp. (NYSE:GME)

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the previous quarter. On the other hand, there were a total of 27 hedge funds with a bullish position in GME a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

More specifically, Maverick Capital was the largest shareholder of GameStop Corp. (NYSE:GME), with a stake worth $13.3 million reported as of the end of September. Trailing Maverick Capital was Scion Asset Management, which amassed a stake valued at $10.5 million. Paradice Investment Management, D E Shaw, 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 Scion Asset Management allocated the biggest weight to GameStop Corp. (NYSE:GME), around 12.23% of its 13F portfolio. Paradice Investment Management is also relatively very bullish on the stock, setting aside 0.75 percent of its 13F equity portfolio to GME.

Seeing as GameStop Corp. (NYSE:GME) has faced declining sentiment from hedge fund managers, we can see that there is a sect of hedgies that decided to sell off their positions entirely last quarter. Intriguingly, Israel Englander’s Millennium Management dropped the largest position of the 750 funds watched by Insider Monkey, worth about $6.9 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dropped about $2.6 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 3 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as GameStop Corp. (NYSE:GME) but similarly valued. We will take a look at Entercom Communications Corp. (NYSE:ETM), Tellurian Inc. (NASDAQ:TELL), SC Health Corporation (NYSE:SCPE), and Jumia Technologies AG (NYSE:JMIA). All of these stocks’ market caps are closest to GME’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ETM 17 13101 -6
TELL 6 1521 -5
SCPE 16 57393 -1
JMIA 6 7689 0
Average 11.25 19926 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $20 million. That figure was $43 million in GME’s case. Entercom Communications Corp. (NYSE:ETM) is the most popular stock in this table. On the other hand Tellurian Inc. (NASDAQ:TELL) is the least popular one with only 6 bullish hedge fund positions. GameStop Corp. (NYSE:GME) 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately GME wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on GME were disappointed as the stock returned 14.6% 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.