It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Autohome Inc (NYSE:ATHM).
Is Autohome Inc (NYSE:ATHM) a good investment right now? Investors who are in the know are turning less bullish. The number of long hedge fund positions fell by 6 recently. Our calculations also showed that ATHM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ATHM was in 10 hedge funds’ portfolios at the end of the third quarter of 2019. There were 16 hedge funds in our database with ATHM holdings at the end of the previous quarter.
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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 gander at the key hedge fund action regarding Autohome Inc (NYSE:ATHM).
What does smart money think about Autohome Inc (NYSE:ATHM)?
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -38% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in ATHM over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, William B. Gray’s Orbis Investment Management has the largest position in Autohome Inc (NYSE:ATHM), worth close to $807.8 million, amounting to 6% of its total 13F portfolio. Coming in second is Select Equity Group, led by Robert Joseph Caruso, holding a $171.3 million position; 1.2% of its 13F portfolio is allocated to the stock. Some other hedge funds and institutional investors that hold long positions contain Kerr Neilson’s Platinum Asset Management, David E. Shaw’s D E Shaw and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Orbis Investment Management allocated the biggest weight to Autohome Inc (NYSE:ATHM), around 5.97% of its 13F portfolio. Platinum Asset Management is also relatively very bullish on the stock, dishing out 2.48 percent of its 13F equity portfolio to ATHM.
Judging by the fact that Autohome Inc (NYSE:ATHM) has faced a decline in interest from hedge fund managers, logic holds that there is a sect of fund managers that slashed their entire stakes by the end of the third quarter. Intriguingly, Richard Driehaus’s Driehaus Capital cut the biggest investment of all the hedgies tracked by Insider Monkey, valued at an estimated $9.7 million in stock, and Ernest Chow and Jonathan Howe’s Sensato Capital Management was right behind this move, as the fund said goodbye to about $6.6 million worth. These transactions are interesting, as total hedge fund interest was cut by 6 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks similar to Autohome Inc (NYSE:ATHM). We will take a look at Chewy, Inc. (NYSE:CHWY), Trimble Inc. (NASDAQ:TRMB), Devon Energy Corp (NYSE:DVN), and Erie Indemnity Company (NASDAQ:ERIE). This group of stocks’ market valuations are closest to ATHM’s market valuation.
|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 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $607 million. That figure was $1157 million in ATHM’s case. Devon Energy Corp (NYSE:DVN) is the most popular stock in this table. On the other hand Erie Indemnity Company (NASDAQ:ERIE) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Autohome Inc (NYSE:ATHM) is even less popular than ERIE. Hedge funds dodged a bullet by taking a bearish stance towards ATHM. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ATHM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ATHM investors were disappointed as the stock returned -18.1% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.