Is Ecopetrol S.A. (EC) Going to Burn These Hedge Funds?
Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's analyze whether Ecopetrol S.A. (NYSE:EC) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.
Ecopetrol S.A. (NYSE:EC) has seen an increase in hedge fund sentiment in recent months. EC was in 11 hedge funds' portfolios at the end of December. There were 10 hedge funds in our database with EC holdings at the end of the previous quarter. Our calculations also showed that EC isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 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 S&P 500 ETFs by more than 41 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_26073" align="aligncenter" width="400"]
Jim Simons of Renaissance Technologies[/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, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Keeping this in mind we're going to go over the fresh hedge fund action encompassing Ecopetrol S.A. (NYSE:EC).
How are hedge funds trading Ecopetrol S.A. (NYSE:EC)?
Heading into the first quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in EC 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.
Among these funds, Renaissance Technologies held the most valuable stake in Ecopetrol S.A. (NYSE:EC), which was worth $156.2 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $32.9 million worth of shares. Point72 Asset Management, Millennium Management, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Qtron Investments allocated the biggest weight to Ecopetrol S.A. (NYSE:EC), around 0.7% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, designating 0.12 percent of its 13F equity portfolio to EC.
Consequently, some big names have jumped into Ecopetrol S.A. (NYSE:EC) headfirst. D E Shaw, managed by D. E. Shaw, initiated the most valuable position in Ecopetrol S.A. (NYSE:EC). D E Shaw had $1.2 million invested in the company at the end of the quarter. Ken Griffin's Citadel Investment Group also initiated a $0.4 million position during the quarter. The only other fund with a new position in the stock is Claes Fornell's CSat Investment Advisory.
Let's now take a look at hedge fund activity in other stocks similar to Ecopetrol S.A. (NYSE:EC). We will take a look at Keurig Dr Pepper Inc. (NASDAQ:KDP), The Dow Chemical Company (NYSE:DOW), Autodesk, Inc. (NASDAQ:ADSK), and V.F. Corporation (NYSE:VFC). All of these stocks' market caps match EC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KDP,26,593887,3 DOW,34,165271,-3 ADSK,64,3357850,16 VFC,29,770788,-7 Average,38.25,1221949,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 38.25 hedge funds with bullish positions and the average amount invested in these stocks was $1222 million. That figure was $229 million in EC's case. Autodesk, Inc. (NASDAQ:ADSK) is the most popular stock in this table. On the other hand Keurig Dr Pepper Inc. (NASDAQ:KDP) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Ecopetrol S.A. (NYSE:EC) is even less popular than KDP. Hedge funds dodged a bullet by taking a bearish stance towards EC. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but managed to beat the market by 3.1 percentage points. Unfortunately EC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); EC investors were disappointed as the stock returned -43% during the same time period 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 most of these stocks already outperformed the market so far in Q1.
Disclosure: None. This article was originally published at Insider Monkey.
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