Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about Dril-Quip, Inc. (NYSE:DRQ).
Dril-Quip, Inc. (NYSE:DRQ) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 18 hedge funds' portfolios at the end of the third quarter of 2019. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as WillScot Corporation (NASDAQ:WSC), Hostess Brands, Inc. (NASDAQ:TWNK), and BancFirst Corporation (NASDAQ:BANF) to gather more data points. Our calculations also showed that DRQ isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to 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 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_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/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. 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 also rely on the best performing hedge funds' buy/sell signals. We're going to analyze the fresh hedge fund action encompassing Dril-Quip, Inc. (NYSE:DRQ).
What have hedge funds been doing with Dril-Quip, Inc. (NYSE:DRQ)?
Heading into the fourth quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. By comparison, 18 hedge funds held shares or bullish call options in DRQ 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 Dril-Quip, Inc. (NYSE:DRQ) was held by Fisher Asset Management, which reported holding $87.4 million worth of stock at the end of September. It was followed by GAMCO Investors with a $28.9 million position. Other investors bullish on the company included Birch Run Capital, Citadel Investment Group, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Birch Run Capital allocated the biggest weight to Dril-Quip, Inc. (NYSE:DRQ), around 2.4% of its 13F portfolio. GAMCO Investors is also relatively very bullish on the stock, setting aside 0.24 percent of its 13F equity portfolio to DRQ.
Because Dril-Quip, Inc. (NYSE:DRQ) has faced falling interest from the entirety of the hedge funds we track, it's safe to say that there was a specific group of hedge funds that slashed their entire stakes heading into Q4. It's worth mentioning that Anand Parekh's Alyeska Investment Group sold off the largest stake of the 750 funds followed by Insider Monkey, worth about $10.9 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also dumped its stock, about $1.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Dril-Quip, Inc. (NYSE:DRQ) but similarly valued. We will take a look at WillScot Corporation (NASDAQ:WSC), Hostess Brands, Inc. (NASDAQ:TWNK), BancFirst Corporation (NASDAQ:BANF), and Varonis Systems Inc (NASDAQ:VRNS). All of these stocks' market caps are similar to DRQ's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WSC,24,213487,1 TWNK,31,291630,5 BANF,9,46666,0 VRNS,23,409397,-1 Average,21.75,240295,1.25 [/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 $240 million. That figure was $160 million in DRQ's case. Hostess Brands, Inc. (NASDAQ:TWNK) is the most popular stock in this table. On the other hand BancFirst Corporation (NASDAQ:BANF) is the least popular one with only 9 bullish hedge fund positions. Dril-Quip, Inc. (NYSE:DRQ) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately DRQ wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DRQ investors were disappointed as the stock returned -15.8% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.