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. At Insider Monkey, we pore over the filings of nearly 835 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we've gathered as a result gives us access to a wealth of collective knowledge based on these firms' portfolio holdings as of December 31. In this article, we will use that wealth of knowledge to determine whether or not Cleveland-Cliffs Inc (NYSE:CLF) makes for a good investment right now.
Is Cleveland-Cliffs Inc (NYSE:CLF) a superb investment right now? The best stock pickers are in a bullish mood. The number of long hedge fund positions moved up by 3 in recent months. Our calculations also showed that CLF 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_26335" align="aligncenter" width="399"] Ken Fisher of Fisher Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we're going to take a gander at the fresh hedge fund action encompassing Cleveland-Cliffs Inc (NYSE:CLF).
Hedge fund activity in Cleveland-Cliffs Inc (NYSE:CLF)
Heading into the first quarter of 2020, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from the third quarter of 2019. On the other hand, there were a total of 29 hedge funds with a bullish position in CLF a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Fisher Asset Management, managed by Ken Fisher, holds the largest position in Cleveland-Cliffs Inc (NYSE:CLF). Fisher Asset Management has a $83.3 million position in the stock, comprising 0.1% of its 13F portfolio. The second largest stake is held by LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, which holds a $31.9 million position; 1.5% of its 13F portfolio is allocated to the stock. Some other peers that hold long positions include Ken Griffin's Citadel Investment Group, and Chuck Royce's Royce & Associates. In terms of the portfolio weights assigned to each position Tegean Capital Management allocated the biggest weight to Cleveland-Cliffs Inc (NYSE:CLF), around 3.74% of its 13F portfolio. Jade Capital Advisors is also relatively very bullish on the stock, setting aside 1.75 percent of its 13F equity portfolio to CLF.
As industrywide interest jumped, specific money managers were breaking ground themselves. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, initiated the largest position in Cleveland-Cliffs Inc (NYSE:CLF). LMR Partners had $31.9 million invested in the company at the end of the quarter. Todd J. Kantor's Encompass Capital Advisors also made a $12.4 million investment in the stock during the quarter. The following funds were also among the new CLF investors: Michel Massoud's Melqart Asset Management, Dmitry Balyasny's Balyasny Asset Management, and David Alexander Witkin's Beryl Capital Management.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Cleveland-Cliffs Inc (NYSE:CLF) but similarly valued. These stocks are Virgin Galactic Holdings, Inc. (NYSE:SPCE), NMI Holdings Inc (NASDAQ:NMIH), Synthorx, Inc. (NASDAQ:THOR), and Hilltop Holdings Inc. (NYSE:HTH). This group of stocks' market caps match CLF's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPCE,32,285203,6 NMIH,21,263260,1 THOR,25,1284990,18 HTH,19,99488,-1 Average,24.25,483235,6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $483 million. That figure was $231 million in CLF's case. Virgin Galactic Holdings, Inc. (NYSE:SPCE) is the most popular stock in this table. On the other hand Hilltop Holdings Inc. (NYSE:HTH) is the least popular one with only 19 bullish hedge fund positions. Cleveland-Cliffs Inc (NYSE:CLF) is not the most popular stock in this group but hedge fund interest is still above average. 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 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 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately CLF wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CLF were disappointed as the stock returned -50.7% 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 many of these stocks already outperformed the market so far this year. 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.