money Do Hedge Funds Love LexinFintech Holdings Ltd. (LX)?
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 (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We have processed the filings of the more than 835 world-class investment firms that we track and now have access to the collective wisdom contained in these filings, which are based on their December 31 holdings, data that is available nowhere else. Should you consider LexinFintech Holdings Ltd. (NASDAQ:LX) for your portfolio? We'll look to this invaluable collective wisdom for the answer.
Is LexinFintech Holdings Ltd. (NASDAQ:LX) a buy right now? The smart money is getting less bullish. The number of bullish hedge fund positions fell by 2 lately. Our calculations also showed that LX 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.
[caption id="attachment_745225" align="aligncenter" width="400"]
Noam Gottesman of GLG Partners[/caption]
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. Now we're going to take a gander at the key hedge fund action regarding LexinFintech Holdings Ltd. (NASDAQ:LX).
How are hedge funds trading LexinFintech Holdings Ltd. (NASDAQ:LX)?
At Q4's end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. On the other hand, there were a total of 4 hedge funds with a bullish position in LX a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, GLG Partners was the largest shareholder of LexinFintech Holdings Ltd. (NASDAQ:LX), with a stake worth $40.8 million reported as of the end of September. Trailing GLG Partners was Renaissance Technologies, which amassed a stake valued at $22.6 million. Kora Management, Prince Street Capital Management, and Arrowstreet 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 Kora Management allocated the biggest weight to LexinFintech Holdings Ltd. (NASDAQ:LX), around 4.37% of its 13F portfolio. Prince Street Capital Management is also relatively very bullish on the stock, dishing out 4.13 percent of its 13F equity portfolio to LX.
Due to the fact that LexinFintech Holdings Ltd. (NASDAQ:LX) has witnessed a decline in interest from the smart money, logic holds that there were a few fund managers who were dropping their full holdings heading into Q4. Intriguingly, Lee Ainslie's Maverick Capital said goodbye to the biggest stake of all the hedgies monitored by Insider Monkey, totaling close to $4.3 million in stock, and D. E. Shaw's D E Shaw was right behind this move, as the fund said goodbye to about $0.7 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 2 funds heading into Q4.
Let's go over hedge fund activity in other stocks similar to LexinFintech Holdings Ltd. (NASDAQ:LX). These stocks are Xenia Hotels & Resorts Inc (NYSE:XHR), Afya Limited (NASDAQ:AFYA), Arco Platform Limited (NASDAQ:ARCE), and The Ensign Group, Inc. (NASDAQ:ENSG). This group of stocks' market values match LX's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XHR,11,45672,2 AFYA,9,55035,2 ARCE,17,169461,5 ENSG,15,126763,-3 Average,13,99233,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $99 million. That figure was $117 million in LX's case. Arco Platform Limited (NASDAQ:ARCE) is the most popular stock in this table. On the other hand Afya Limited (NASDAQ:AFYA) is the least popular one with only 9 bullish hedge fund positions. LexinFintech Holdings Ltd. (NASDAQ:LX) 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately LX wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); LX investors were disappointed as the stock returned -24.8% 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 in Q1.
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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