Is Extended Stay America Inc (STAY) Going To Burn These Hedge Funds ?

World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients’ money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It’s not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It’s also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.

Is Extended Stay America Inc (NASDAQ:STAY) ready to rally soon? The best stock pickers are taking a bearish view. The number of bullish hedge fund bets decreased by 4 recently. Our calculations also showed that STAY isn’t among the 30 most popular stocks among hedge funds (view the video below). STAY was in 28 hedge funds’ portfolios at the end of June. There were 32 hedge funds in our database with STAY positions at the end of the previous quarter.
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.

Jeffrey Tannenbaum, Fir Tree

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 take a look at the key hedge fund action encompassing Extended Stay America Inc (NASDAQ:STAY).

What does smart money think about Extended Stay America Inc (NASDAQ:STAY)?

Heading into the third quarter of 2019, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the first quarter of 2019. By comparison, 24 hedge funds held shares or bullish call options in STAY a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with STAY Positions

Among these funds, Long Pond Capital held the most valuable stake in Extended Stay America Inc (NASDAQ:STAY), which was worth $76.8 million at the end of the second quarter. On the second spot was Citadel Investment Group which amassed $66.8 million worth of shares. Moreover, Cardinal Capital, Arrowstreet Capital, and Fir Tree were also bullish on Extended Stay America Inc (NASDAQ:STAY), allocating a large percentage of their portfolios to this stock.

Because Extended Stay America Inc (NASDAQ:STAY) has witnessed falling interest from hedge fund managers, it’s easy to see that there exists a select few hedgies that elected to cut their full holdings heading into Q3. Intriguingly, Christian Leone’s Luxor Capital Group cut the largest position of all the hedgies followed by Insider Monkey, totaling an estimated $73 million in stock, and Isaac Corre’s Governors Lane was right behind this move, as the fund sold off about $22.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to Extended Stay America Inc (NASDAQ:STAY). We will take a look at FS KKR Capital Corp. (NYSE:FSK), Rogers Corporation (NYSE:ROG), Colfax Corporation (NYSE:CFX), and Schneider National, Inc. (NYSE:SNDR). This group of stocks’ market caps are closest to STAY’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FSK 16 223657 -3
ROG 19 77827 10
CFX 27 551842 -5
SNDR 21 96266 2
Average 20.75 237398 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $237 million. That figure was $495 million in STAY’s case. Colfax Corporation (NYSE:CFX) is the most popular stock in this table. On the other hand FS KKR Capital Corp. (NYSE:FSK) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Extended Stay America Inc (NASDAQ:STAY) 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 STAY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on STAY were disappointed as the stock returned -11.9% 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.