Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Boyd Gaming Corporation (NYSE:BYD).
Is Boyd Gaming Corporation (NYSE:BYD) a buy right now? Prominent investors are becoming more confident. The number of long hedge fund bets advanced by 2 in recent months. Our calculations also showed that BYD 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 analyze the new hedge fund action encompassing Boyd Gaming Corporation (NYSE:BYD).
What have hedge funds been doing with Boyd Gaming Corporation (NYSE:BYD)?
Heading into the third quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from the first quarter of 2019. On the other hand, there were a total of 27 hedge funds with a bullish position in BYD a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, David Gallo’s Valinor Management LLC has the largest position in Boyd Gaming Corporation (NYSE:BYD), worth close to $68.6 million, corresponding to 4.1% of its total 13F portfolio. On Valinor Management LLC’s heels is PAR Capital Management, managed by Paul Reeder and Edward Shapiro, which holds a $63.6 million position; the fund has 1.1% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions encompass Jacob Doft’s Highline Capital Management, Mario Gabelli’s GAMCO Investors and Israel Englander’s Millennium Management.
With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Long Pond Capital, managed by John Khoury, established the most outsized position in Boyd Gaming Corporation (NYSE:BYD). Long Pond Capital had $15.8 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also initiated a $6.1 million position during the quarter. The other funds with new positions in the stock are Joe DiMenna’s ZWEIG DIMENNA PARTNERS, James Dinan’s York Capital Management, and Dmitry Balyasny’s Balyasny Asset Management.
Let’s now review hedge fund activity in other stocks similar to Boyd Gaming Corporation (NYSE:BYD). These stocks are The Ensign Group, Inc. (NASDAQ:ENSG), SINA Corp (NASDAQ:SINA), TerraForm Power Inc (NASDAQ:TERP), and Corporate Office Properties Trust (NYSE:OFC). All of these stocks’ market caps are similar to BYD’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 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $192 million. That figure was $350 million in BYD’s case. SINA Corp (NASDAQ:SINA) is the most popular stock in this table. On the other hand TerraForm Power Inc (NASDAQ:TERP) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Boyd Gaming Corporation (NYSE:BYD) is more popular among hedge funds. 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 BYD wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on BYD were disappointed as the stock returned -10.8% 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 in Q3.
Disclosure: None. This article was originally published at Insider Monkey.