Is Chegg Inc (CHGG) Going To Burn These Hedge Funds ?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds’ top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Chegg Inc (NYSE:CHGG).

Chegg Inc (NYSE:CHGG) has experienced a decrease in hedge fund interest recently. CHGG was in 26 hedge funds’ portfolios at the end of June. There were 36 hedge funds in our database with CHGG holdings at the end of the previous quarter. Our calculations also showed that CHGG isn’t among the 30 most popular stocks among hedge funds (view the video below).
5 Most Popular Stocks Among Hedge Funds
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.

Bill Miller

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. We’re going to check out the fresh hedge fund action surrounding Chegg Inc (NYSE:CHGG).

Hedge fund activity in Chegg Inc (NYSE:CHGG)

At Q2’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -28% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in CHGG over the last 16 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).


Among these funds, Sylebra Capital Management held the most valuable stake in Chegg Inc (NYSE:CHGG), which was worth $136.7 million at the end of the second quarter. On the second spot was Renaissance Technologies which amassed $43.6 million worth of shares. Moreover, Hitchwood Capital Management, Polar Capital, and D E Shaw were also bullish on Chegg Inc (NYSE:CHGG), allocating a large percentage of their portfolios to this stock.

Since Chegg Inc (NYSE:CHGG) has faced a decline in interest from the smart money, it’s easy to see that there is a sect of fund managers who were dropping their positions entirely heading into Q3. At the top of the heap, Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital sold off the biggest position of the 750 funds monitored by Insider Monkey, comprising about $16.4 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund cut about $11 million worth. These transactions are interesting, as total hedge fund interest fell by 10 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks similar to Chegg Inc (NYSE:CHGG). These stocks are New York Community Bancorp, Inc. (NYSE:NYCB), Churchill Downs Incorporated (NASDAQ:CHDN), Essent Group Ltd (NYSE:ESNT), and First Industrial Realty Trust, Inc. (NYSE:FR). 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
NYCB 19 194360 7
CHDN 25 681457 -4
ESNT 30 325693 3
FR 18 290383 7
Average 23 372973 3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $373 million. That figure was $432 million in CHGG’s case. Essent Group Ltd (NYSE:ESNT) is the most popular stock in this table. On the other hand First Industrial Realty Trust, Inc. (NYSE:FR) is the least popular one with only 18 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. 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 CHGG wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CHGG were disappointed as the stock returned -22.4% 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.