Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Cathay General Bancorp (NASDAQ:CATY).
Hedge fund interest in Cathay General Bancorp (NASDAQ:CATY) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Antero Resources Corp (NYSE:AR), BRP Inc. (NASDAQ:DOOO), and Coca-Cola Bottling Co. Consolidated (NASDAQ:COKE) to gather more data points.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Let’s analyze the new hedge fund action surrounding Cathay General Bancorp (NASDAQ:CATY).
Hedge fund activity in Cathay General Bancorp (NASDAQ:CATY)
Heading into the second quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2018. By comparison, 10 hedge funds held shares or bullish call options in CATY a year ago. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Among these funds, GLG Partners held the most valuable stake in Cathay General Bancorp (NASDAQ:CATY), which was worth $11.7 million at the end of the first quarter. On the second spot was Adage Capital Management which amassed $7 million worth of shares. Moreover, Renaissance Technologies, AQR Capital Management, and Two Sigma Advisors were also bullish on Cathay General Bancorp (NASDAQ:CATY), allocating a large percentage of their portfolios to this stock.
Due to the fact that Cathay General Bancorp (NASDAQ:CATY) has faced falling interest from the entirety of the hedge funds we track, it’s safe to say that there is a sect of hedgies who were dropping their entire stakes by the end of the third quarter. At the top of the heap, Israel Englander’s Millennium Management dropped the largest investment of all the hedgies monitored by Insider Monkey, valued at close to $2 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also said goodbye to its stock, about $1.2 million worth. These moves are intriguing to say the least, 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 similar to Cathay General Bancorp (NASDAQ:CATY). We will take a look at Antero Resources Corp (NYSE:AR), BRP Inc. (NASDAQ:DOOO), Coca-Cola Consolidated, Inc. (NASDAQ:COKE), and The Ensign Group, Inc. (NASDAQ:ENSG). All of these stocks’ market caps are similar to CATY’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $282 million. That figure was $39 million in CATY’s case. Antero Resources Corp (NYSE:AR) is the most popular stock in this table. On the other hand Coca-Cola Consolidated, Inc. (NASDAQ:COKE) is the least popular one with only 9 bullish hedge fund positions. Cathay General Bancorp (NASDAQ:CATY) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately CATY wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CATY investors were disappointed as the stock returned 2.5% 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.