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Should I Buy Covanta Holding Corporation (CVA)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Covanta Holding Corporation (NYSE:CVA)? The smart money sentiment can provide an answer to this question.

Covanta Holding Corporation (NYSE:CVA) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds' portfolios at the end of March. Our calculations also showed that CVA isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Cogentix Medical Inc (NASDAQ:CGNT), Plains GP Holdings LP (NYSE:PAGP), and Hyliion Holdings Corp. (NYSE:HYLN) to gather more data points.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Donald Sussman Paloma Partners
Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery 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. Keeping this in mind we're going to view the recent hedge fund action encompassing Covanta Holding Corporation (NYSE:CVA).

Do Hedge Funds Think CVA Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2020. By comparison, 25 hedge funds held shares or bullish call options in CVA a year ago. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Is CVA A Good Stock To Buy?
Is CVA A Good Stock To Buy?

Among these funds, HG Vora Capital Management held the most valuable stake in Covanta Holding Corporation (NYSE:CVA), which was worth $65.8 million at the end of the fourth quarter. On the second spot was Electron Capital Partners which amassed $37.9 million worth of shares. Ardsley Partners, Royce & Associates, and Empyrean Capital Partners 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 HG Vora Capital Management allocated the biggest weight to Covanta Holding Corporation (NYSE:CVA), around 3.52% of its 13F portfolio. Electron Capital Partners is also relatively very bullish on the stock, dishing out 2.62 percent of its 13F equity portfolio to CVA.

Since Covanta Holding Corporation (NYSE:CVA) has witnessed declining sentiment from hedge fund managers, it's safe to say that there is a sect of money managers that elected to cut their full holdings heading into Q2. Interestingly, Bernard Lambilliotte's Ecofin Ltd cut the largest investment of all the hedgies tracked by Insider Monkey, valued at about $22.4 million in stock. Brandon Haley's fund, Holocene Advisors, also cut its stock, about $0.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Covanta Holding Corporation (NYSE:CVA) but similarly valued. We will take a look at Cogentix Medical Inc (NASDAQ:CGNT), Plains GP Holdings LP (NYSE:PAGP), Hyliion Holdings Corp. (NYSE:HYLN), Grupo Simec S.A.B. de C.V. (NYSE:SIM), Cullinan Oncology, Inc. (NASDAQ:CGEM), SJW Corp. (NYSE:SJW), and Lindsay Corporation (NYSE:LNN). This group of stocks' market caps are similar to CVA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CGNT,12,233892,12 PAGP,15,72231,-3 HYLN,12,26624,0 SIM,1,2970,0 CGEM,21,340716,21 SJW,9,73497,1 LNN,10,219448,-4 Average,11.4,138483,3.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.4 hedge funds with bullish positions and the average amount invested in these stocks was $138 million. That figure was $181 million in CVA's case. Cullinan Oncology, Inc. (NASDAQ:CGEM) is the most popular stock in this table. On the other hand Grupo Simec S.A.B. de C.V. (NYSE:SIM) is the least popular one with only 1 bullish hedge fund positions. Covanta Holding Corporation (NYSE:CVA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CVA is 80.2. 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 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 23.8% in 2021 through July 16th and still beat the market by 7.7 percentage points. Hedge funds were also right about betting on CVA as the stock returned 45% since the end of Q1 (through 7/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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