How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding ConocoPhillips (NYSE:COP).
ConocoPhillips (NYSE:COP) investors should be aware of an increase in activity from the world's largest hedge funds lately. Our calculations also showed that COP isn't among the 30 most popular stocks among hedge funds (see the video at the end of this article).
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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
[caption id="attachment_25717" align="aligncenter" width="440"] Steve Cohen[/caption]
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a gander at the new hedge fund action encompassing ConocoPhillips (NYSE:COP).
How have hedgies been trading ConocoPhillips (NYSE:COP)?
Heading into the third quarter of 2019, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the previous quarter. By comparison, 47 hedge funds held shares or bullish call options in COP 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.
More specifically, D E Shaw was the largest shareholder of ConocoPhillips (NYSE:COP), with a stake worth $792 million reported as of the end of March. Trailing D E Shaw was Citadel Investment Group, which amassed a stake valued at $364.1 million. AQR Capital Management, Point72 Asset Management, and Fisher Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, key money managers were leading the bulls' herd. Adage Capital Management, managed by Phill Gross and Robert Atchinson, initiated the most outsized position in ConocoPhillips (NYSE:COP). Adage Capital Management had $58.1 million invested in the company at the end of the quarter. Anand Parekh's Alyeska Investment Group also initiated a $48 million position during the quarter. The other funds with new positions in the stock are Steve Cohen's Point72 Asset Management, Vince Maddi and Shawn Brennan's SIR Capital Management, and Perella Weinberg Partners.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as ConocoPhillips (NYSE:COP) but similarly valued. These stocks are Westpac Banking Corporation (NYSE:WBK), Sony Corporation (NYSE:SNE), The Estee Lauder Companies Inc (NYSE:EL), and Equinor ASA (NYSE:EQNR). This group of stocks' market valuations resemble COP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WBK,3,37127,-3 SNE,35,1036064,13 EL,36,1355411,-3 EQNR,13,386566,3 Average,21.75,703792,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $704 million. That figure was $3406 million in COP's case. The Estee Lauder Companies Inc (NYSE:EL) is the most popular stock in this table. On the other hand Westpac Banking Corporation (NYSE:WBK) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks ConocoPhillips (NYSE:COP) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately COP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on COP were disappointed as the stock returned -6.1% during the third quarter 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 in Q3. 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.