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Did Hedge Funds Make The Right Call On Diamondback Energy Inc (FANG)?

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The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Diamondback Energy Inc (NASDAQ:FANG) and determine whether the smart money was really smart about this stock.

Is Diamondback Energy Inc (NASDAQ:FANG) the right investment to pursue these days? Hedge funds were becoming less hopeful. The number of bullish hedge fund bets were trimmed by 13 in recent months. Our calculations also showed that FANG isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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_260193" align="aligncenter" width="392"]

Keith Meister of Corvex Capital[/caption]

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now let's take a look at the new hedge fund action regarding Diamondback Energy Inc (NASDAQ:FANG).

What have hedge funds been doing with Diamondback Energy Inc (NASDAQ:FANG)?

Heading into the second quarter of 2020, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -30% from the fourth quarter of 2019. By comparison, 47 hedge funds held shares or bullish call options in FANG a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Diamondback Energy Inc (NASDAQ:FANG) was held by Carlson Capital, which reported holding $32.1 million worth of stock at the end of September. It was followed by Corvex Capital with a $31.1 million position. Other investors bullish on the company included Balyasny Asset Management, Millennium Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Birch Run Capital allocated the biggest weight to Diamondback Energy Inc (NASDAQ:FANG), around 3.72% of its 13F portfolio. Corvex Capital is also relatively very bullish on the stock, setting aside 2.41 percent of its 13F equity portfolio to FANG.

Because Diamondback Energy Inc (NASDAQ:FANG) has experienced a decline in interest from the smart money, logic holds that there was a specific group of hedge funds that elected to cut their full holdings last quarter. Intriguingly, Steve Cohen's Point72 Asset Management dumped the biggest stake of the "upper crust" of funds followed by Insider Monkey, worth close to $86.3 million in stock, and Leon Cooperman's Omega Advisors was right behind this move, as the fund dropped about $37.1 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 13 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to Diamondback Energy Inc (NASDAQ:FANG). We will take a look at Lincoln Electric Holdings, Inc. (NASDAQ:LECO), China Biologic Products Holdings Inc (NASDAQ:CBPO), Gold Fields Limited (NYSE:GFI), and Comerica Incorporated (NYSE:CMA). This group of stocks' market caps are closest to FANG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LECO,19,157727,3 CBPO,16,612733,-3 GFI,22,244665,4 CMA,33,255146,-3 Average,22.5,317568,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $318 million. That figure was $241 million in FANG's case. Comerica Incorporated (NYSE:CMA) is the most popular stock in this table. On the other hand China Biologic Products Holdings Inc (NASDAQ:CBPO) is the least popular one with only 16 bullish hedge fund positions. Diamondback Energy Inc (NASDAQ:FANG) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on FANG as the stock returned 61.1% in Q2 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.

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