At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Trip.com Group Limited (NASDAQ:TCOM) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Trip.com Group Limited (NASDAQ:TCOM) undervalued? The smart money was in a bearish mood. The number of long hedge fund bets shrunk by 2 lately. Trip.com Group Limited (NASDAQ:TCOM) was in 29 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 67. Our calculations also showed that TCOM 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). There were 31 hedge funds in our database with TCOM positions at the end of the first quarter.
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 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 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 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.
Kerr Neilson of Platinum Asset Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let's go over the recent hedge fund action surrounding Trip.com Group Limited (NASDAQ:TCOM).
What does smart money think about Trip.com Group Limited (NASDAQ:TCOM)?
At second quarter's end, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TCOM over the last 20 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
More specifically, Fisher Asset Management was the largest shareholder of Trip.com Group Limited (NASDAQ:TCOM), with a stake worth $274.9 million reported as of the end of September. Trailing Fisher Asset Management was Renaissance Technologies, which amassed a stake valued at $235.1 million. Platinum Asset Management, Broad Peak Investment Holdings, and Kontiki 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 Kontiki Capital allocated the biggest weight to Trip.com Group Limited (NASDAQ:TCOM), around 12.82% of its 13F portfolio. Broad Peak Investment Holdings is also relatively very bullish on the stock, designating 7.76 percent of its 13F equity portfolio to TCOM.
Since Trip.com Group Limited (NASDAQ:TCOM) has witnessed declining sentiment from hedge fund managers, logic holds that there is a sect of hedge funds that slashed their positions entirely heading into Q3. At the top of the heap, Wang Chan's Serenity Capital cut the biggest position of the "upper crust" of funds followed by Insider Monkey, valued at about $71.7 million in stock, and D. E. Shaw's D E Shaw was right behind this move, as the fund dumped about $49.2 million worth. These moves are interesting, as total hedge fund interest fell by 2 funds heading into Q3.
Let's now review hedge fund activity in other stocks similar to Trip.com Group Limited (NASDAQ:TCOM). These stocks are Invitation Homes Inc. (NYSE:INVH), Check Point Software Technologies Ltd. (NASDAQ:CHKP), Discover Financial Services (NYSE:DFS), Vulcan Materials Company (NYSE:VMC), Telefonica Brasil SA (NYSE:VIV), Quest Diagnostics Incorporated (NYSE:DGX), and Cardinal Health, Inc. (NYSE:CAH). This group of stocks' market valuations are similar to TCOM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position INVH,33,694166,6 CHKP,28,725079,-1 DFS,44,740724,4 VMC,51,879902,2 VIV,12,99788,4 DGX,46,804000,8 CAH,49,956785,5 Average,37.6,700063,4 [/table]
As you can see these stocks had an average of 37.6 hedge funds with bullish positions and the average amount invested in these stocks was $700 million. That figure was $1235 million in TCOM's case. Vulcan Materials Company (NYSE:VMC) is the most popular stock in this table. On the other hand Telefonica Brasil SA (NYSE:VIV) is the least popular one with only 12 bullish hedge fund positions. Trip.com Group Limited (NASDAQ:TCOM) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TCOM is 37.8. 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. 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 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. A small number of hedge funds were also right about betting on TCOM as the stock returned 13.5% since the end of June (through September 14th) and outperformed the market by an even larger margin.
