Were Hedge Funds Right About Dumping Tencent Music Entertainment Group (TME)?

In this article we are going to use hedge fund sentiment as a tool and determine whether Tencent Music Entertainment Group (NYSE:TME) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Tencent Music Entertainment Group (NYSE:TME) was in 35 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 63. TME shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. There were 63 hedge funds in our database with TME holdings at the end of March. Our calculations also showed that TME isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 79 percentage points since March 2017 (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now we’re going to analyze the fresh hedge fund action surrounding Tencent Music Entertainment Group (NYSE:TME).

Do Hedge Funds Think TME Is A Good Stock To Buy Now?

At Q2’s end, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of -44% from one quarter earlier. By comparison, 30 hedge funds held shares or bullish call options in TME a year ago. So, let’s check out 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, SoMa Equity Partners, managed by Gil Simon, holds the biggest position in Tencent Music Entertainment Group (NYSE:TME). SoMa Equity Partners has a $193.5 million position in the stock, comprising 4.1% of its 13F portfolio. The second largest stake is held by Renaissance Technologies, holding a $81.8 million position; 0.1% of its 13F portfolio is allocated to the company. Some other peers with similar optimism comprise Paul Marshall and Ian Wace’s Marshall Wace LLP, Sanjay Venkat’s Jeneq Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Dalton Investments allocated the biggest weight to Tencent Music Entertainment Group (NYSE:TME), around 8.75% of its 13F portfolio. Jeneq Management is also relatively very bullish on the stock, earmarking 6.28 percent of its 13F equity portfolio to TME.

Because Tencent Music Entertainment Group (NYSE:TME) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there were a few hedgies that elected to cut their positions entirely by the end of the second quarter. At the top of the heap, Martin Taylor’s Crake Asset Management dumped the biggest stake of all the hedgies tracked by Insider Monkey, valued at an estimated $98 million in stock. George Yang’s fund, Anatole Investment Management, also sold off its stock, about $80.8 million worth. These moves are interesting, as total hedge fund interest fell by 28 funds by the end of the second quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Tencent Music Entertainment Group (NYSE:TME). These stocks are Etsy Inc (NASDAQ:ETSY), Generac Holdings Inc. (NYSE:GNRC), Slack Technologies Inc (NYSE:WORK), Hormel Foods Corporation (NYSE:HRL), Weyerhaeuser Co. (NYSE:WY), Kansas City Southern (NYSE:KSU), and Teladoc Health, Inc (NYSE:TDOC). This group of stocks’ market caps are similar to TME’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 44.7 hedge funds with bullish positions and the average amount invested in these stocks was $2251 million. That figure was $570 million in TME’s case. Slack Technologies Inc (NYSE:WORK) is the most popular stock in this table. On the other hand Hormel Foods Corporation (NYSE:HRL) is the least popular one with only 24 bullish hedge fund positions. Tencent Music Entertainment Group (NYSE:TME) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TME is 8.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and surpassed the market again by 3.1 percentage points. Unfortunately TME wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); TME investors were disappointed as the stock returned -49.6% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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Disclosure: None. This article was originally published at Insider Monkey.