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How Did Canadian Natural Resources Limited (CNQ) Compare Against Top Hedge Fund Stocks in 2019?

Debasis Saha

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Canadian Natural Resources Limited (NYSE:CNQ).

Is Canadian Natural Resources Limited (NYSE:CNQ) ready to rally soon? Investors who are in the know are taking a bullish view. The number of long hedge fund bets rose by 8 recently. Our calculations also showed that CNQ isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). CNQ was in 32 hedge funds' portfolios at the end of September. There were 24 hedge funds in our database with CNQ holdings at the end of the previous quarter.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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="alignnone" width="1613"] Noam Gottesman of GLG Partners[/caption]

Noam Gottesman GLG Partners

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind we're going to check out the key hedge fund action surrounding Canadian Natural Resources Limited (NYSE:CNQ).

What does smart money think about Canadian Natural Resources Limited (NYSE:CNQ)?

Heading into the fourth quarter of 2019, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 33% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CNQ over the last 17 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Is CNQ A Good Stock To Buy?

The largest stake in Canadian Natural Resources Limited (NYSE:CNQ) was held by Polar Capital, which reported holding $73.9 million worth of stock at the end of September. It was followed by GLG Partners with a $61.5 million position. Other investors bullish on the company included GMT Capital, D E Shaw, and Point72 Asset Management. In terms of the portfolio weights assigned to each position Elm Ridge Capital allocated the biggest weight to Canadian Natural Resources Limited (NYSE:CNQ), around 7.28% of its 13F portfolio. Scion Asset Management is also relatively very bullish on the stock, earmarking 6.7 percent of its 13F equity portfolio to CNQ.

Now, some big names have jumped into Canadian Natural Resources Limited (NYSE:CNQ) headfirst. Marshall Wace, managed by Paul Marshall and Ian Wace, established the largest position in Canadian Natural Resources Limited (NYSE:CNQ). Marshall Wace had $34.1 million invested in the company at the end of the quarter. Matt Smith's Deep Basin Capital also initiated a $17.8 million position during the quarter. The following funds were also among the new CNQ investors: Till Bechtolsheimer's Arosa Capital Management, Renaissance Technologies, and Brad Dunkley and Blair Levinsky's Waratah Capital Advisors.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Canadian Natural Resources Limited (NYSE:CNQ) but similarly valued. These stocks are Monster Beverage Corp (NASDAQ:MNST), Tyson Foods, Inc. (NYSE:TSN), Public Service Enterprise Group Incorporated (NYSE:PEG), and Consolidated Edison, Inc. (NYSE:ED). This group of stocks' market valuations are closest to CNQ's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MNST,34,2641322,-4 TSN,48,1716693,9 PEG,18,838718,-5 ED,22,1396380,-4 Average,30.5,1648278,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.5 hedge funds with bullish positions and the average amount invested in these stocks was $1648 million. That figure was $558 million in CNQ's case. Tyson Foods, Inc. (NYSE:TSN) is the most popular stock in this table. On the other hand Public Service Enterprise Group Incorporated (NYSE:PEG) is the least popular one with only 18 bullish hedge fund positions. Canadian Natural Resources Limited (NYSE:CNQ) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on CNQ, though not to the same extent, as the stock returned 37.3% during 2019 (as of 12/23) and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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