While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, many smart money investors are starting to get cautious towards the current bull run since March, 2020 and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding GDS Holdings Limited (NASDAQ:GDS).
Is GDS a good stock to buy? GDS Holdings Limited (NASDAQ:GDS) investors should be aware of a decrease in hedge fund interest of late. GDS Holdings Limited (NASDAQ:GDS) was in 38 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 47. Our calculations also showed that GDS isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).
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 79 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.
James Dinan of York Capital Management
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this emerging biotech 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 take a peek at the recent hedge fund action regarding GDS Holdings Limited (NASDAQ:GDS).
Do Hedge Funds Think GDS Is A Good Stock To Buy Now?
Heading into the third quarter of 2021, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the first quarter of 2020. By comparison, 43 hedge funds held shares or bullish call options in GDS a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Joel Ramin’s 12 West Capital Management has the biggest position in GDS Holdings Limited (NASDAQ:GDS), worth close to $749.9 million, amounting to 31.4% of its total 13F portfolio. The second largest stake is held by Tiger Global Management LLC, managed by Chase Coleman, which holds a $201.9 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish consist of David Thomas’s Atalan Capital, John Khoury’s Long Pond Capital and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners. In terms of the portfolio weights assigned to each position 12 West Capital Management allocated the biggest weight to GDS Holdings Limited (NASDAQ:GDS), around 31.44% of its 13F portfolio. Ariose Capital is also relatively very bullish on the stock, dishing out 17.02 percent of its 13F equity portfolio to GDS.
Judging by the fact that GDS Holdings Limited (NASDAQ:GDS) has experienced declining sentiment from the smart money, logic holds that there lies a certain “tier” of funds who sold off their entire stakes last quarter. It’s worth mentioning that Leung Chi Kit’s Kadensa Capital cut the largest investment of the 750 funds followed by Insider Monkey, valued at about $28.4 million in stock, and Louis Bacon’s Moore Global Investments was right behind this move, as the fund dropped about $21.4 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 2 funds last quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as GDS Holdings Limited (NASDAQ:GDS) but similarly valued. We will take a look at Godaddy Inc (NYSE:GDDY), Citrix Systems, Inc. (NASDAQ:CTXS), UDR, Inc. (NYSE:UDR), Fair Isaac Corporation (NYSE:FICO), Apollo Global Management Inc (NYSE:APO), Shaw Communications Inc (NYSE:SJR), and News Corp (NASDAQ:NWS). All of these stocks’ market caps are similar to GDS’s market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GDDY,39,2769173,0 CTXS,23,668537,3 UDR,24,251040,-6 FICO,28,1224920,1 APO,37,2617533,-7 SJR,23,697694,2 NWS,19,178722,-2 Average,27.6,1201088,-1.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.6 hedge funds with bullish positions and the average amount invested in these stocks was $1201 million. That figure was $1649 million in GDS’s case. Godaddy Inc (NYSE:GDDY) is the most popular stock in this table. On the other hand News Corp (NASDAQ:NWS) is the least popular one with only 19 bullish hedge fund positions. GDS Holdings Limited (NASDAQ:GDS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for GDS is 74.8. 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. 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 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 21.8% in 2021 through October 11th and beat the market again by 4.4 percentage points. Unfortunately GDS wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on GDS were disappointed as the stock returned -26.4% since the end of June (through 10/11) 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 many of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.