Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Covetrus, Inc. (NASDAQ:CVET) changed recently.
Covetrus, Inc. (NASDAQ:CVET) was in 20 hedge funds’ portfolios at the end of June. CVET investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 18 hedge funds in our database with CVET positions at the end of the previous quarter. Our calculations also showed that CVET isn’t among the 30 most popular stocks among hedge funds (view the video below).
Video: Click the image to 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 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s check out the new hedge fund action surrounding Covetrus, Inc. (NASDAQ:CVET).
Hedge fund activity in Covetrus, Inc. (NASDAQ:CVET)
At Q2’s end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from the previous quarter. On the other hand, there were a total of 0 hedge funds with a bullish position in CVET a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Select Equity Group was the largest shareholder of Covetrus, Inc. (NASDAQ:CVET), with a stake worth $136 million reported as of the end of March. Trailing Select Equity Group was Hillhouse Capital Management, which amassed a stake valued at $114.2 million. Viking Global, Freshford Capital Management, and Park West Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
Now, specific money managers were breaking ground themselves. Freshford Capital Management, managed by Michael Doheny, assembled the most outsized position in Covetrus, Inc. (NASDAQ:CVET). Freshford Capital Management had $29.3 million invested in the company at the end of the quarter. Renaissance Technologies also made a $6.2 million investment in the stock during the quarter. The other funds with new positions in the stock are Noam Gottesman’s GLG Partners, Brian Gootzeit and Andrew Frank’s StackLine Partners, and Dmitry Balyasny’s Balyasny Asset Management.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Covetrus, Inc. (NASDAQ:CVET) but similarly valued. These stocks are Wingstop Inc (NASDAQ:WING), Pan American Silver Corp. (NASDAQ:PAAS), Murphy USA Inc. (NYSE:MUSA), and Energizer Holdings, Inc. (NYSE:ENR). This group of stocks’ market valuations are closest to CVET’s market valuation.
|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 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $249 million. That figure was $427 million in CVET’s case. Wingstop Inc (NASDAQ:WING) is the most popular stock in this table. On the other hand Pan American Silver Corp. (NASDAQ:PAAS) is the least popular one with only 17 bullish hedge fund positions. Covetrus, Inc. (NASDAQ:CVET) 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately CVET wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CVET were disappointed as the stock returned -51.4% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.