It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Central Garden & Pet Co (NASDAQ:CENT).
Is Central Garden & Pet Co (NASDAQ:CENT) a healthy stock for your portfolio? Money managers are getting more bullish. The number of bullish hedge fund positions inched up by 4 lately. Our calculations also showed that CENT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the recent hedge fund action regarding Central Garden & Pet Co (NASDAQ:CENT).
What does smart money think about Central Garden & Pet Co (NASDAQ:CENT)?
At the end of the third quarter, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CENT over the last 17 quarters. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Central Garden & Pet Co (NASDAQ:CENT) was held by Renaissance Technologies, which reported holding $25.6 million worth of stock at the end of September. It was followed by Echo Street Capital Management with a $17.6 million position. Other investors bullish on the company included D E Shaw, Portolan Capital Management, and CQS Cayman LP. In terms of the portfolio weights assigned to each position Portolan Capital Management allocated the biggest weight to Central Garden & Pet Co (NASDAQ:CENT), around 1.47% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, earmarking 0.8 percent of its 13F equity portfolio to CENT.
As aggregate interest increased, some big names were leading the bulls’ herd. Ellington, managed by Mike Vranos, established the most outsized position in Central Garden & Pet Co (NASDAQ:CENT). Ellington had $0.7 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also made a $0.4 million investment in the stock during the quarter. The following funds were also among the new CENT investors: David E. Shaw’s D E Shaw, Donald Sussman’s Paloma Partners, and Mike Vranos’s Ellington.
Let’s check out hedge fund activity in other stocks similar to Central Garden & Pet Co (NASDAQ:CENT). We will take a look at Hailiang Education Group Inc. (NASDAQ:HLG), WestAmerica Bancorp. (NASDAQ:WABC), SPX FLOW, Inc. (NYSE:FLOW), and Aircastle Limited (NYSE:AYR). This group of stocks’ market caps resemble CENT’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 10 hedge funds with bullish positions and the average amount invested in these stocks was $68 million. That figure was $154 million in CENT’s case. Aircastle Limited (NYSE:AYR) is the most popular stock in this table. On the other hand Hailiang Education Group Inc. (NASDAQ:HLG) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Central Garden & Pet Co (NASDAQ:CENT) is more popular among hedge funds. 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. Unfortunately CENT wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CENT were disappointed as the stock returned -9.8% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.