Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Flowserve Corporation (NYSE:FLS).
Is Flowserve Corporation (NYSE:FLS) ready to rally soon? Investors who are in the know are becoming more confident. The number of long hedge fund positions rose by 6 in recent months. Our calculations also showed that FLS isn't among the 30 most popular stocks among hedge funds (view the video below). FLS was in 26 hedge funds' portfolios at the end of June. There were 20 hedge funds in our database with FLS positions at the end of the previous quarter. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's go over the recent hedge fund action encompassing Flowserve Corporation (NYSE:FLS).
What have hedge funds been doing with Flowserve Corporation (NYSE:FLS)?
At the end of the second quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 30% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in FLS a year ago. With the smart money's capital changing hands, there exists a few key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
More specifically, GAMCO Investors was the largest shareholder of Flowserve Corporation (NYSE:FLS), with a stake worth $130.1 million reported as of the end of March. Trailing GAMCO Investors was Impax Asset Management, which amassed a stake valued at $53.9 million. Renaissance Technologies, Interval Partners, and Balyasny Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
Now, some big names have jumped into Flowserve Corporation (NYSE:FLS) headfirst. AQR Capital Management, managed by Cliff Asness, initiated the most valuable position in Flowserve Corporation (NYSE:FLS). AQR Capital Management had $12.4 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson's Adage Capital Management also made a $8.8 million investment in the stock during the quarter. The other funds with brand new FLS positions are Alexander Mitchell's Scopus Asset Management, Anand Parekh's Alyeska Investment Group, and Paul Marshall and Ian Wace's Marshall Wace LLP.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Flowserve Corporation (NYSE:FLS) but similarly valued. We will take a look at GrubHub Inc (NYSE:GRUB), Old Republic International Corporation (NYSE:ORI), BRF S.A. (NYSE:BRFS), and Charles River Laboratories International Inc. (NYSE:CRL). This group of stocks' market values resemble FLS's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GRUB,32,808367,0 ORI,21,413524,2 BRFS,13,124053,3 CRL,29,1066583,5 Average,23.75,603132,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $603 million. That figure was $344 million in FLS's case. GrubHub Inc (NYSE:GRUB) is the most popular stock in this table. On the other hand BRF S.A. (NYSE:BRFS) is the least popular one with only 13 bullish hedge fund positions. Flowserve Corporation (NYSE:FLS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately FLS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FLS were disappointed as the stock returned -11% during the third 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.