While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding National General Holdings Corp (NASDAQ:NGHC).
Is National General Holdings Corp (NASDAQ:NGHC) a buy, sell, or hold? Hedge funds are in a bearish mood. The number of long hedge fund positions were trimmed by 1 in recent months. Our calculations also showed that NGHC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the fresh hedge fund action regarding National General Holdings Corp (NASDAQ:NGHC).
What does smart money think about National General Holdings Corp (NASDAQ:NGHC)?
Heading into the fourth quarter of 2019, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards NGHC over the last 17 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in National General Holdings Corp (NASDAQ:NGHC) was held by Park West Asset Management, which reported holding $120.5 million worth of stock at the end of September. It was followed by MSDC Management with a $49.8 million position. Other investors bullish on the company included Nut Tree Capital, AQR Capital Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Nut Tree Capital allocated the biggest weight to National General Holdings Corp (NASDAQ:NGHC), around 8.12% of its 13F portfolio. MSDC Management is also relatively very bullish on the stock, designating 6.68 percent of its 13F equity portfolio to NGHC.
Since National General Holdings Corp (NASDAQ:NGHC) has faced a decline in interest from the smart money, it’s safe to say that there were a few hedgies that decided to sell off their positions entirely last quarter. It’s worth mentioning that Paul Marshall and Ian Wace’s Marshall Wace dropped the largest investment of the “upper crust” of funds tracked by Insider Monkey, valued at an estimated $3.4 million in stock, and Paul Tudor Jones’s Tudor Investment Corp was right behind this move, as the fund cut about $0.5 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 1 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as National General Holdings Corp (NASDAQ:NGHC) but similarly valued. These stocks are World Fuel Services Corporation (NYSE:INT), Element Solutions Inc (NYSE:ESI), Wright Medical Group N.V. (NASDAQ:WMGI), and Sunoco LP (NYSE:SUN). This group of stocks’ market valuations are closest to NGHC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| INT | 18 | 200195 | -1 |
| ESI | 26 | 604940 | -1 |
| WMGI | 35 | 705939 | 1 |
| SUN | 3 | 6682 | -3 |
| Average | 20.5 | 379439 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $379 million. That figure was $224 million in NGHC’s case. Wright Medical Group N.V. (NASDAQ:WMGI) is the most popular stock in this table. On the other hand Sunoco LP (NYSE:SUN) is the least popular one with only 3 bullish hedge fund positions. National General Holdings Corp (NASDAQ:NGHC) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately NGHC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); NGHC investors were disappointed as the stock returned -7.3% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
