Were Hedge Funds Wrong About Piling Into Cannae Holdings, Inc. (CNNE)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Cannae Holdings, Inc. (NYSE:CNNE).

Cannae Holdings, Inc. (NYSE:CNNE) has experienced an increase in activity from the world’s largest hedge funds recently. Cannae Holdings, Inc. (NYSE:CNNE) was in 43 hedge funds’ portfolios at the end of June. The all time high for this statistics is 31. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 20 hedge funds in our database with CNNE positions at the end of the first quarter. Our calculations also showed that CNNE isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Michael Platt Bluecrest Capital Management

Michael Platt of BlueCrest Capital Mgmt.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best high dividend stocks to buy to identify solid dividend stocks trading at rock bottom prices. 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 website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a peek at the fresh hedge fund action encompassing Cannae Holdings, Inc. (NYSE:CNNE).

How are hedge funds trading Cannae Holdings, Inc. (NYSE:CNNE)?

At Q2’s end, a total of 43 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 115% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards CNNE over the last 20 quarters. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Is CNNE A Good Stock To Buy?

More specifically, Nitorum Capital was the largest shareholder of Cannae Holdings, Inc. (NYSE:CNNE), with a stake worth $153.1 million reported as of the end of September. Trailing Nitorum Capital was Empyrean Capital Partners, which amassed a stake valued at $78.1 million. Azora Capital, Millennium Management, and Eminence Capital 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 Azora Capital allocated the biggest weight to Cannae Holdings, Inc. (NYSE:CNNE), around 11.86% of its 13F portfolio. Strycker View Capital is also relatively very bullish on the stock, earmarking 8.34 percent of its 13F equity portfolio to CNNE.

As one would reasonably expect, some big names have jumped into Cannae Holdings, Inc. (NYSE:CNNE) headfirst. Azora Capital, managed by Ravi Chopra, assembled the most outsized position in Cannae Holdings, Inc. (NYSE:CNNE). Azora Capital had $72.6 million invested in the company at the end of the quarter. Ricky Sandler’s Eminence Capital also made a $28.7 million investment in the stock during the quarter. The following funds were also among the new CNNE investors: Michael Platt and William Reeves’s BlueCrest Capital Mgmt., Zachary Miller’s Parian Global Management, and Anand Parekh’s Alyeska Investment Group.

Let’s go over hedge fund activity in other stocks similar to Cannae Holdings, Inc. (NYSE:CNNE). These stocks are Cloudera, Inc. (NYSE:CLDR), Ballard Power Systems Inc. (NASDAQ:BLDP), Novanta Inc. (NASDAQ:NOVT), Portland General Electric Company (NYSE:POR), Perspecta Inc. (NYSE:PRSP), BRP Inc. (NASDAQ:DOOO), and Curtiss-Wright Corp. (NYSE:CW). This group of stocks’ market valuations are closest to CNNE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CLDR 33 855546 7
BLDP 16 76980 6
NOVT 18 103718 8
POR 21 164563 -2
PRSP 46 653988 14
DOOO 14 149741 4
CW 26 257924 5
Average 24.9 323209 6

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.9 hedge funds with bullish positions and the average amount invested in these stocks was $323 million. That figure was $596 million in CNNE’s case. Perspecta Inc. (NYSE:PRSP) is the most popular stock in this table. On the other hand BRP Inc. (NASDAQ:DOOO) is the least popular one with only 14 bullish hedge fund positions. Cannae Holdings, Inc. (NYSE:CNNE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CNNE is 85.3. 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 positive signal but 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately CNNE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CNNE were disappointed as the stock returned -3.4% since the end of June (through 10/23) 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 many of these stocks already outperformed the market so far this year.

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