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Hedge Funds Never Been This Bullish On Chegg Inc (CHGG)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 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 June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Chegg Inc (NYSE:CHGG) and determine whether the smart money was really smart about this stock.

Chegg Inc (NYSE:CHGG) has seen an increase in activity from the world’s largest hedge funds in recent months. Chegg Inc (NYSE:CHGG) was in 45 hedge funds’ portfolios at the end of June. The all time high for this statistics is 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 34 hedge funds in our database with CHGG positions at the end of the first quarter. Our calculations also showed that CHGG isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 56 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, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. With all of this in mind we’re going to review the latest hedge fund action encompassing Chegg Inc (NYSE:CHGG).

What does smart money think about Chegg Inc (NYSE:CHGG)?

At the end of the second quarter, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 32% from one quarter earlier. By comparison, 26 hedge funds held shares or bullish call options in CHGG 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, Sylebra Capital Management was the largest shareholder of Chegg Inc (NYSE:CHGG), with a stake worth $205.3 million reported as of the end of September. Trailing Sylebra Capital Management was Millennium Management, which amassed a stake valued at $96.7 million. Citadel Investment Group, SCGE Management, and Millennium Management 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 Selkirk Management allocated the biggest weight to Chegg Inc (NYSE:CHGG), around 9.32% of its 13F portfolio. Greenhouse Funds is also relatively very bullish on the stock, designating 6.48 percent of its 13F equity portfolio to CHGG.

With a general bullishness amongst the heavyweights, key money managers have jumped into Chegg Inc (NYSE:CHGG) headfirst. Millennium Management, managed by Israel Englander, initiated the most outsized position in Chegg Inc (NYSE:CHGG). Millennium Management had $96.7 million invested in the company at the end of the quarter. Christopher Lyle’s SCGE Management also made a $82.4 million investment in the stock during the quarter. The other funds with brand new CHGG positions are Israel Englander’s Millennium Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and James Crichton’s Hitchwood Capital Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Chegg Inc (NYSE:CHGG) but similarly valued. We will take a look at Mylan N.V. (NASDAQ:MYL), Gold Fields Limited (NYSE:GFI), Caesars Entertainment, Inc. (NASDAQ:CZR), MGM Resorts International (NYSE:MGM), Carnival Corporation & plc (NYSE:CUK), Pinnacle West Capital Corporation (NYSE:PNW), and Everest Re Group Ltd (NYSE:RE). All of these stocks’ market caps resemble CHGG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MYL 46 1646058 -3
GFI 15 548446 -7
CZR 50 3911673 3
MGM 32 1006863 -18
CUK 14 72014 5
PNW 25 753260 0
RE 29 585163 2
Average 30.1 1217640 -2.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.1 hedge funds with bullish positions and the average amount invested in these stocks was $1218 million. That figure was $1005 million in CHGG’s case. Caesars Entertainment, Inc. (NASDAQ:CZR) is the most popular stock in this table. On the other hand Carnival Corporation & plc (NYSE:CUK) is the least popular one with only 14 bullish hedge fund positions. Chegg Inc (NYSE:CHGG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CHGG is 83.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately CHGG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CHGG were disappointed as the stock returned 9.6% 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.