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Should You Buy China Southern Airlines Co Ltd (ZNH)?

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 (10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. At Insider Monkey, we pore over the filings of nearly 835 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of December 31. In this article, we will use that wealth of knowledge to determine whether or not China Southern Airlines Co Ltd (NYSE:ZNH) makes for a good investment right now.

China Southern Airlines Co Ltd (NYSE:ZNH) was in 3 hedge funds’ portfolios at the end of December. ZNH investors should be aware of an increase in support from the world’s most elite money managers lately. There were 2 hedge funds in our database with ZNH holdings at the end of the previous quarter. Our calculations also showed that ZNH 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).

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 S&P 500 ETFs by more than 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. 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.

Izzy Englander of MILLENNIUM MANAGEMENT

Israel Englander of Millennium Management

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 let’s review the recent hedge fund action encompassing China Southern Airlines Co Ltd (NYSE:ZNH).

How have hedgies been trading China Southern Airlines Co Ltd (NYSE:ZNH)?

Heading into the first quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 50% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ZNH over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of China Southern Airlines Co Ltd (NYSE:ZNH), with a stake worth $13.4 million reported as of the end of September. Trailing Renaissance Technologies was Citadel Investment Group, which amassed a stake valued at $0.3 million. Millennium Management was 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 Renaissance Technologies allocated the biggest weight to China Southern Airlines Co Ltd (NYSE:ZNH), around 0.01% of its 13F portfolio. Millennium Management is also relatively very bullish on the stock, setting aside 0.0003 percent of its 13F equity portfolio to ZNH.

With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Millennium Management, managed by Israel Englander, established the most valuable position in China Southern Airlines Co Ltd (NYSE:ZNH). Millennium Management had $0.2 million invested in the company at the end of the quarter.

Let’s go over hedge fund activity in other stocks similar to China Southern Airlines Co Ltd (NYSE:ZNH). These stocks are AerCap Holdings N.V. (NYSE:AER), Catalent Inc (NYSE:CTLT), Voya Financial Inc (NYSE:VOYA), and Zayo Group Holdings Inc (NYSE:ZAYO). All of these stocks’ market caps match ZNH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AER 36 1423682 5
CTLT 21 390050 -8
VOYA 43 1130069 3
ZAYO 52 2277778 -1
Average 38 1305395 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 38 hedge funds with bullish positions and the average amount invested in these stocks was $1305 million. That figure was $14 million in ZNH’s case. Zayo Group Holdings Inc (NYSE:ZAYO) is the most popular stock in this table. On the other hand Catalent Inc (NYSE:CTLT) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks China Southern Airlines Co Ltd (NYSE:ZNH) is even less popular than CTLT. Hedge funds dodged a bullet by taking a bearish stance towards ZNH. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. Unfortunately ZNH wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ZNH investors were disappointed as the stock returned -31.2% during the same time period 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 so far in Q1.
5 Most Popular Stocks Among Hedge Funds
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.

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