Were Hedge Funds Right About Souring On Five Point Holdings, LLC (FPH)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Five Point Holdings, LLC (NYSE:FPH) and determine whether hedge funds had an edge regarding this stock.

Five Point Holdings, LLC (NYSE:FPH) was in 13 hedge funds’ portfolios at the end of March. FPH investors should be aware of a decrease in enthusiasm from smart money in recent months. There were 15 hedge funds in our database with FPH holdings at the end of the previous quarter. Our calculations also showed that FPH isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Martin Whitman Third Avenue Management Marty Whitman

Martin Whitman of Third Avenue Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 9 states that banned plastic bags to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to view the fresh hedge fund action encompassing Five Point Holdings, LLC (NYSE:FPH).

What does smart money think about Five Point Holdings, LLC (NYSE:FPH)?

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in FPH over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is FPH A Good Stock To Buy?

Among these funds, Luxor Capital Group held the most valuable stake in Five Point Holdings, LLC (NYSE:FPH), which was worth $59.3 million at the end of the third quarter. On the second spot was Third Avenue Management which amassed $59.1 million worth of shares. Long Pond Capital, Glendon Capital Management, and Scoggin 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 Third Avenue Management allocated the biggest weight to Five Point Holdings, LLC (NYSE:FPH), around 8.73% of its 13F portfolio. Scoggin is also relatively very bullish on the stock, earmarking 4.87 percent of its 13F equity portfolio to FPH.

Because Five Point Holdings, LLC (NYSE:FPH) has faced declining sentiment from hedge fund managers, logic holds that there were a few money managers who were dropping their full holdings heading into Q4. Interestingly, Michael Blitzer’s Kingstown Capital Management said goodbye to the largest stake of the 750 funds monitored by Insider Monkey, comprising an estimated $8.7 million in stock. Jody LaNasa’s fund, Serengeti Asset Management, also dumped its stock, about $0.7 million worth. These moves are interesting, as total hedge fund interest fell by 2 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to Five Point Holdings, LLC (NYSE:FPH). We will take a look at Gol Linhas Aereas Inteligentes SA (NYSE:GOL), Avaya Holdings Corp. (NYSE:AVYA), Krystal Biotech, Inc. (NASDAQ:KRYS), and Cerus Corporation (NASDAQ:CERS). This group of stocks’ market values resemble FPH’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GOL 11 39509 -1
AVYA 27 142047 -12
KRYS 9 188739 0
CERS 17 105927 5
Average 16 119056 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $119 million. That figure was $175 million in FPH’s case. Avaya Holdings Corp. (NYSE:AVYA) is the most popular stock in this table. On the other hand Krystal Biotech, Inc. (NASDAQ:KRYS) is the least popular one with only 9 bullish hedge fund positions. Five Point Holdings, LLC (NYSE:FPH) is not the least popular stock in this group but hedge fund interest is still below average. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th and surpassed the market by 16.8 percentage points. Unfortunately FPH wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); FPH investors were disappointed as the stock returned -11.6% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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