We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether China Unicom (Hong Kong) Limited (NYSE:CHU) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
China Unicom (Hong Kong) Limited (NYSE:CHU) was in 11 hedge funds’ portfolios at the end of the fourth quarter of 2019. CHU has seen an increase in enthusiasm from smart money recently. There were 8 hedge funds in our database with CHU positions at the end of the previous quarter. Our calculations also showed that CHU isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 41 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.
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a gander at the key hedge fund action regarding China Unicom (Hong Kong) Limited (NYSE:CHU).
Hedge fund activity in China Unicom (Hong Kong) Limited (NYSE:CHU)
At Q4’s end, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of 38% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in CHU over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of China Unicom (Hong Kong) Limited (NYSE:CHU), with a stake worth $42.7 million reported as of the end of September. Trailing Renaissance Technologies was Arrowstreet Capital, which amassed a stake valued at $11.6 million. Millennium Management, PEAK6 Capital Management, and LMR Partners 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 LMR Partners allocated the biggest weight to China Unicom (Hong Kong) Limited (NYSE:CHU), around 0.05% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, earmarking 0.03 percent of its 13F equity portfolio to CHU.
Consequently, key hedge funds have jumped into China Unicom (Hong Kong) Limited (NYSE:CHU) headfirst. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, created the biggest position in China Unicom (Hong Kong) Limited (NYSE:CHU). LMR Partners had $1 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also made a $0.5 million investment in the stock during the quarter. The only other fund with a brand new CHU position is Matthew Tewksbury’s Stevens Capital Management.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as China Unicom (Hong Kong) Limited (NYSE:CHU) but similarly valued. These stocks are Chunghwa Telecom Co., Ltd (NYSE:CHT), Republic Services, Inc. (NYSE:RSG), TAL Education Group (NYSE:TAL), and T. Rowe Price Group, Inc. (NASDAQ:TROW). This group of stocks’ market values are closest to CHU’s market value.
|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 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $707 million. That figure was $61 million in CHU’s case. TAL Education Group (NYSE:TAL) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 4 bullish hedge fund positions. China Unicom (Hong Kong) Limited (NYSE:CHU) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately CHU wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CHU investors were disappointed as the stock returned -23.8% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
Disclosure: None. This article was originally published at Insider Monkey.