Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don’t make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Houghton Mifflin Harcourt Co (NASDAQ:HMHC) to find out whether there were any major changes in hedge funds’ views.
Is HMHC a good stock to buy now? Money managers were taking a bearish view. The number of long hedge fund bets dropped by 3 in recent months. Houghton Mifflin Harcourt Co (NASDAQ:HMHC) was in 17 hedge funds’ portfolios at the end of September. The all time high for this statistic is 37. Our calculations also showed that HMHC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: 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 66 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind we’re going to take a gander at the fresh hedge fund action surrounding Houghton Mifflin Harcourt Co (NASDAQ:HMHC).
Do Hedge Funds Think HMHC Is A Good Stock To Buy Now?
At Q3’s end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HMHC over the last 21 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Anchorage Advisors held the most valuable stake in Houghton Mifflin Harcourt Co (NASDAQ:HMHC), which was worth $33.7 million at the end of the third quarter. On the second spot was Water Street Capital which amassed $9 million worth of shares. Rutabaga Capital Management, Engine Capital, and Millennium Management 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 Anchorage Advisors allocated the biggest weight to Houghton Mifflin Harcourt Co (NASDAQ:HMHC), around 2.63% of its 13F portfolio. Rutabaga Capital Management is also relatively very bullish on the stock, earmarking 1.97 percent of its 13F equity portfolio to HMHC.
Seeing as Houghton Mifflin Harcourt Co (NASDAQ:HMHC) has witnessed falling interest from hedge fund managers, it’s safe to say that there exists a select few funds who were dropping their full holdings heading into Q4. Interestingly, Michael Doheny’s Freshford Capital Management said goodbye to the biggest stake of all the hedgies watched by Insider Monkey, comprising an estimated $9.8 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund sold off about $0.5 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 3 funds heading into Q4.
Let’s now review hedge fund activity in other stocks similar to Houghton Mifflin Harcourt Co (NASDAQ:HMHC). These stocks are P.A.M. Transportation Services, Inc. (NASDAQ:PTSI), Transcat, Inc. (NASDAQ:TRNS), Accuray Incorporated (NASDAQ:ARAY), Home Bancorp, Inc. (NASDAQ:HBCP), National CineMedia, Inc. (NASDAQ:NCMI), Kaleyra, Inc. (NYSE:KLR), and Lightinthebox Holding Co Ltd (NYSE:LITB). This group of stocks’ market caps match HMHC’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 7.7 hedge funds with bullish positions and the average amount invested in these stocks was $23 million. That figure was $59 million in HMHC’s case. Accuray Incorporated (NASDAQ:ARAY) is the most popular stock in this table. On the other hand P.A.M. Transportation Services, Inc. (NASDAQ:PTSI) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Houghton Mifflin Harcourt Co (NASDAQ:HMHC) is more popular among hedge funds. Our overall hedge fund sentiment score for HMHC is 65.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 percentage points. These stocks returned 30.7% in 2020 through December 14th but still managed to beat the market by 15.8 percentage points. Hedge funds were also right about betting on HMHC as the stock returned 95.7% since the end of September (through 12/14) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.