Hedge Funds Dropped The Ball On 2U Inc (TWOU)

“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards 2U Inc (NASDAQ:TWOU) and see how it was affected.

Hedge fund interest in 2U Inc (NASDAQ:TWOU) 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 TWOU to other stocks including Weis Markets, Inc. (NYSE:WMK), GreenTree Hospitality Group Ltd. (NYSE:GHG), and HEXO Corp. (NYSE:HEXO) to get a better sense of its popularity.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are several methods stock traders put to use to analyze their stock investments. A couple of the less known methods are hedge fund and insider trading activity. We have shown that, historically, those who follow the top picks of the elite fund managers can beat the S&P 500 by a healthy margin (see the details here).

David Harding

David Harding of Winton Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a glance at the key hedge fund action encompassing 2U Inc (NASDAQ:TWOU).

What have hedge funds been doing with 2U Inc (NASDAQ:TWOU)?

At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards TWOU over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in 2U Inc (NASDAQ:TWOU) was held by Sachem Head Capital, which reported holding $20.8 million worth of stock at the end of September. It was followed by Greenvale Capital with a $17.9 million position. Other investors bullish on the company included AQR Capital Management, D E Shaw, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Greenvale Capital allocated the biggest weight to 2U Inc (NASDAQ:TWOU), around 5.36% of its 13F portfolio. Berylson Capital Partners is also relatively very bullish on the stock, designating 5.17 percent of its 13F equity portfolio to TWOU.

Judging by the fact that 2U Inc (NASDAQ:TWOU) has experienced declining sentiment from the smart money, logic holds that there is a sect of money managers that elected to cut their positions entirely last quarter. It’s worth mentioning that Marcelo Desio’s Lucha Capital Management said goodbye to the biggest investment of the “upper crust” of funds tracked by Insider Monkey, valued at an estimated $14.7 million in stock, and John Overdeck and David Siegel’s Two Sigma Advisors was right behind this move, as the fund dumped about $4.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as 2U Inc (NASDAQ:TWOU) but similarly valued. We will take a look at Weis Markets, Inc. (NYSE:WMK), GreenTree Hospitality Group Ltd. (NYSE:GHG), HEXO Corp. (NYSE:HEXO), and Cryolife Inc (NYSE:CRY). This group of stocks’ market valuations are similar to TWOU’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WMK 15 64020 2
GHG 7 23891 2
HEXO 7 9359 0
CRY 8 20061 -7
Average 9.25 29333 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $29 million. That figure was $88 million in TWOU’s case. Weis Markets, Inc. (NYSE:WMK) is the most popular stock in this table. On the other hand GreenTree Hospitality Group Ltd. (NYSE:GHG) is the least popular one with only 7 bullish hedge fund positions. 2U Inc (NASDAQ:TWOU) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on TWOU as the stock returned 53.2% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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