Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let’s see whether Telephone & Data Systems, Inc. (NYSE:TDS) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Is Telephone & Data Systems, Inc. (NYSE:TDS) ready to rally soon? The best stock pickers are in a bearish mood. The number of long hedge fund bets fell by 7 recently. Our calculations also showed that TDS isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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.
Mario Gabelli of GAMCO Investors
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 review the recent hedge fund action encompassing Telephone & Data Systems, Inc. (NYSE:TDS).
What does smart money think about Telephone & Data Systems, Inc. (NYSE:TDS)?
Heading into the first quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -24% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TDS over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Telephone & Data Systems, Inc. (NYSE:TDS) was held by Renaissance Technologies, which reported holding $85.2 million worth of stock at the end of September. It was followed by GAMCO Investors with a $52.3 million position. Other investors bullish on the company included NWI Management, Millennium Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position NWI Management allocated the biggest weight to Telephone & Data Systems, Inc. (NYSE:TDS), around 1.11% of its 13F portfolio. Game Creek Capital is also relatively very bullish on the stock, designating 0.57 percent of its 13F equity portfolio to TDS.
Because Telephone & Data Systems, Inc. (NYSE:TDS) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there exists a select few money managers who were dropping their positions entirely last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the largest stake of all the hedgies tracked by Insider Monkey, valued at about $9.2 million in stock, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund cut about $1.5 million worth. These transactions are important to note, as total hedge fund interest was cut by 7 funds last quarter.
Let’s now review hedge fund activity in other stocks similar to Telephone & Data Systems, Inc. (NYSE:TDS). We will take a look at Quaker Chemical Corp (NYSE:KWR), AMN Healthcare Services Inc (NYSE:AMN), PotlatchDeltic Corporation (NASDAQ:PCH), and Power Integrations Inc (NASDAQ:POWI). All of these stocks’ market caps match TDS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| KWR | 9 | 156162 | -10 |
| AMN | 10 | 51628 | 1 |
| PCH | 16 | 345548 | -4 |
| POWI | 17 | 62740 | 4 |
| Average | 13 | 154020 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $154 million. That figure was $270 million in TDS’s case. Power Integrations Inc (NASDAQ:POWI) is the most popular stock in this table. On the other hand Quaker Chemical Corp (NYSE:KWR) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Telephone & Data Systems, Inc. (NYSE:TDS) is more popular among hedge funds. 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 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately TDS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on TDS were disappointed as the stock returned -33.7% during the first two and a half months of 2020 (through March 25th) 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
