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Should You Avoid Norwegian Cruise Line Holdings Ltd (NCLH)?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Norwegian Cruise Line Holdings Ltd (NYSE:NCLH).

Is Norwegian Cruise Line Holdings Ltd (NYSE:NCLH) worth your attention right now? The best stock pickers are selling. The number of bullish hedge fund bets were trimmed by 5 recently. Our calculations also showed that NCLH isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
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.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to view the fresh hedge fund action regarding Norwegian Cruise Line Holdings Ltd (NYSE:NCLH).

What does smart money think about Norwegian Cruise Line Holdings Ltd (NYSE:NCLH)?

At Q3’s end, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from one quarter earlier. On the other hand, there were a total of 41 hedge funds with a bullish position in NCLH a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

NCLH_dec2019

More specifically, AQR Capital Management was the largest shareholder of Norwegian Cruise Line Holdings Ltd (NYSE:NCLH), with a stake worth $253.9 million reported as of the end of September. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $246.7 million. HG Vora Capital Management, Arrowstreet Capital, and Marshall Wace 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 HG Vora Capital Management allocated the biggest weight to Norwegian Cruise Line Holdings Ltd (NYSE:NCLH), around 9.17% of its portfolio. MD Sass is also relatively very bullish on the stock, designating 4.98 percent of its 13F equity portfolio to NCLH.

Judging by the fact that Norwegian Cruise Line Holdings Ltd (NYSE:NCLH) 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 full holdings in the third quarter. At the top of the heap, Gregg Moskowitz’s Interval Partners sold off the biggest position of the “upper crust” of funds followed by Insider Monkey, totaling about $44.4 million in call options. Gregg Moskowitz’s fund, Interval Partners, also said goodbye to its call options, about $32.7 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 5 funds in the third quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Norwegian Cruise Line Holdings Ltd (NYSE:NCLH) but similarly valued. We will take a look at Open Text Corporation (NASDAQ:OTEX), Pinnacle West Capital Corporation (NYSE:PNW), DocuSign, Inc. (NASDAQ:DOCU), and AXA Equitable Holdings, Inc. (NYSE:EQH). This group of stocks’ market caps resemble NCLH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OTEX 14 610442 -2
PNW 24 865074 1
DOCU 26 673817 0
EQH 21 1062610 -11
Average 21.25 802986 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $803 million. That figure was $1012 million in NCLH’s case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand Open Text Corporation (NASDAQ:OTEX) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Norwegian Cruise Line Holdings Ltd (NYSE:NCLH) is more popular among hedge funds. 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 NCLH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on NCLH were disappointed as the stock returned 3.6% 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.

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