Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Steel Dynamics, Inc. (NASDAQ:STLD) and compare its performance to hedge funds' consensus picks in 2019.
Is Steel Dynamics, Inc. (NASDAQ:STLD) an excellent investment right now? Prominent investors are turning less bullish. The number of long hedge fund positions were trimmed by 6 lately. Our calculations also showed that STLD 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). STLD was in 25 hedge funds' portfolios at the end of the third quarter of 2019. There were 31 hedge funds in our database with STLD holdings at the end of the previous quarter.
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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_365194" align="alignnone" width="600"] David E. Shaw of D.E. Shaw[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. With all of this in mind let's view the key hedge fund action encompassing Steel Dynamics, Inc. (NASDAQ:STLD).
What have hedge funds been doing with Steel Dynamics, Inc. (NASDAQ:STLD)?
Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in STLD a year ago. With the smart money's capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, D E Shaw, managed by David E. Shaw, holds the largest position in Steel Dynamics, Inc. (NASDAQ:STLD). D E Shaw has a $168.2 million position in the stock, comprising 0.2% of its 13F portfolio. The second largest stake is held by Cliff Asness of AQR Capital Management, with a $80.2 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish encompass Renaissance Technologies, Ken Griffin's Citadel Investment Group and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position Centenus Global Management allocated the biggest weight to Steel Dynamics, Inc. (NASDAQ:STLD), around 0.84% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, dishing out 0.56 percent of its 13F equity portfolio to STLD.
Judging by the fact that Steel Dynamics, Inc. (NASDAQ:STLD) has faced declining sentiment from the aggregate hedge fund industry, it's safe to say that there were a few hedgies who were dropping their entire stakes by the end of the third quarter. At the top of the heap, Steve Cohen's Point72 Asset Management cut the biggest stake of all the hedgies watched by Insider Monkey, totaling an estimated $35.8 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also sold off its stock, about $12.8 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 6 funds by the end of the third quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Steel Dynamics, Inc. (NASDAQ:STLD) but similarly valued. These stocks are PVH Corp (NYSE:PVH), Signature Bank (NASDAQ:SBNY), New Residential Investment Corp (NYSE:NRZ), and The Gap Inc. (NYSE:GPS). This group of stocks' market values are similar to STLD's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PVH,27,1027637,-5 SBNY,32,502279,3 NRZ,19,141891,3 GPS,25,148276,4 Average,25.75,455021,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $455 million. That figure was $516 million in STLD's case. Signature Bank (NASDAQ:SBNY) is the most popular stock in this table. On the other hand New Residential Investment Corp (NYSE:NRZ) is the least popular one with only 19 bullish hedge fund positions. Steel Dynamics, Inc. (NASDAQ:STLD) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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. Unfortunately STLD wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); STLD investors were disappointed as the stock returned 16.8% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019. 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.