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Hedge Funds Dropped The Ball On Uniti Group Inc. (UNIT)

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 Uniti Group Inc. (NASDAQ:UNIT) and determine whether hedge funds had an edge regarding this stock.

Is Uniti Group Inc. (NASDAQ:UNIT) a bargain? Prominent investors were in a pessimistic mood. The number of long hedge fund positions decreased by 2 in recent months. Our calculations also showed that UNIT 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). UNIT was in 13 hedge funds’ portfolios at the end of the first quarter of 2020. There were 15 hedge funds in our database with UNIT positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 biggest gold mining companies to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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 let’s take a look at the key hedge fund action encompassing Uniti Group Inc. (NASDAQ:UNIT).

What does smart money think about Uniti Group Inc. (NASDAQ:UNIT)?

At the end of the first quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. On the other hand, there were a total of 21 hedge funds with a bullish position in UNIT a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is UNIT A Good Stock To Buy?

The largest stake in Uniti Group Inc. (NASDAQ:UNIT) was held by Mason Capital Management, which reported holding $30 million worth of stock at the end of September. It was followed by D E Shaw with a $17.3 million position. Other investors bullish on the company included Two Sigma Advisors, Sylebra Capital Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Mason Capital Management allocated the biggest weight to Uniti Group Inc. (NASDAQ:UNIT), around 9.55% of its 13F portfolio. Sylebra Capital Management is also relatively very bullish on the stock, earmarking 0.34 percent of its 13F equity portfolio to UNIT.

Seeing as Uniti Group Inc. (NASDAQ:UNIT) has witnessed falling interest from the smart money, we can see that there was a specific group of funds who were dropping their entire stakes heading into Q4. Intriguingly, Martin Hughes’s Toscafund Asset Management dumped the biggest position of the 750 funds followed by Insider Monkey, worth close to $14.9 million in stock. Mendel Hui’s fund, Isomer Partners, also cut its stock, about $12.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Uniti Group Inc. (NASDAQ:UNIT). We will take a look at Osisko Gold Royalties Ltd (NYSE:OR), Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC), AdaptHealth Corp. (NASDAQ:AHCO), and Azul S.A. (NYSE:AZUL). This group of stocks’ market values are closest to UNIT’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OR 13 101894 0
TRHC 7 18000 1
AHCO 10 349980 0
AZUL 8 49217 -3
Average 9.5 129773 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $130 million. That figure was $73 million in UNIT’s case. Osisko Gold Royalties Ltd (NYSE:OR) is the most popular stock in this table. On the other hand Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) is the least popular one with only 7 bullish hedge fund positions. Uniti Group Inc. (NASDAQ:UNIT) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on UNIT as the stock returned 49.8% in Q2 (through June 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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