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 Louisiana-Pacific Corporation (NYSE:LPX) and determine whether hedge funds had an edge regarding this stock.
Louisiana-Pacific Corporation (NYSE:LPX) was in 26 hedge funds' portfolios at the end of the first quarter of 2020. LPX shareholders have witnessed a decrease in hedge fund sentiment lately. There were 29 hedge funds in our database with LPX holdings at the end of the previous quarter. Our calculations also showed that LPX 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.
Today there are plenty of formulas stock traders have at their disposal to grade publicly traded companies. A couple of the most useful formulas are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the best picks of the top hedge fund managers can beat the broader indices by a healthy amount (see the details here).
[caption id="attachment_26262" align="aligncenter" width="359"] Steven Cohen of Point72 Asset Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's analyze the recent hedge fund action surrounding Louisiana-Pacific Corporation (NYSE:LPX).
Hedge fund activity in Louisiana-Pacific Corporation (NYSE:LPX)
At Q1's end, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in LPX a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Phill Gross and Robert Atchinson's Adage Capital Management has the number one position in Louisiana-Pacific Corporation (NYSE:LPX), worth close to $65.3 million, amounting to 0.2% of its total 13F portfolio. Sitting at the No. 2 spot is Impala Asset Management, managed by Robert Bishop, which holds a $54 million position; the fund has 7.3% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish contain Israel Englander's Millennium Management, Renaissance Technologies and Josh Donfeld and David Rogers's Castle Hook Partners. In terms of the portfolio weights assigned to each position Impala Asset Management allocated the biggest weight to Louisiana-Pacific Corporation (NYSE:LPX), around 7.27% of its 13F portfolio. Castle Hook Partners is also relatively very bullish on the stock, setting aside 1.86 percent of its 13F equity portfolio to LPX.
Due to the fact that Louisiana-Pacific Corporation (NYSE:LPX) has experienced falling interest from the entirety of the hedge funds we track, it's safe to say that there was a specific group of fund managers that elected to cut their positions entirely heading into Q4. At the top of the heap, Louis Bacon's Moore Global Investments dumped the biggest investment of all the hedgies monitored by Insider Monkey, worth close to $9.9 million in stock. Alexander Mitchell's fund, Scopus Asset Management, also said goodbye to its stock, about $8.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 3 funds heading into Q4.
Let's go over hedge fund activity in other stocks similar to Louisiana-Pacific Corporation (NYSE:LPX). We will take a look at Telephone & Data Systems, Inc. (NYSE:TDS), Trinity Industries, Inc. (NYSE:TRN), Altair Engineering Inc. (NASDAQ:ALTR), and Saia Inc (NASDAQ:SAIA). This group of stocks' market caps match LPX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TDS,21,149832,-1 TRN,18,621944,-9 ALTR,9,195585,-1 SAIA,13,63362,-4 Average,15.25,257681,-3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $258 million. That figure was $326 million in LPX's case. Telephone & Data Systems, Inc. (NYSE:TDS) is the most popular stock in this table. On the other hand Altair Engineering Inc. (NASDAQ:ALTR) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Louisiana-Pacific Corporation (NYSE:LPX) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on LPX as the stock returned 50.4% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.