We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 Diamondback Energy Inc (NASDAQ:FANG).
Hedge fund interest in Diamondback Energy Inc (NASDAQ:FANG) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Celanese Corporation (NYSE:CE), CNH Industrial NV (NYSE:CNHI), and Evergy, Inc. (NYSE:EVRG) to gather more data points. Our calculations also showed that FANG isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
In the 21st century investor’s toolkit there are numerous tools market participants employ to assess publicly traded companies. A pair of the most innovative tools are hedge fund and insider trading sentiment. Our experts have shown that, historically, those who follow the top picks of the best fund managers can trounce their index-focused peers by a healthy amount (see the details here).
[caption id="attachment_260193" align="aligncenter" width="400"] Keith Meister of Corvex Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now we're going to take a glance at the recent hedge fund action surrounding Diamondback Energy Inc (NASDAQ:FANG).
How have hedgies been trading Diamondback Energy Inc (NASDAQ:FANG)?
Heading into the first quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the third quarter of 2019. On the other hand, there were a total of 44 hedge funds with a bullish position in FANG a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Corvex Capital, managed by Keith Meister, holds the biggest position in Diamondback Energy Inc (NASDAQ:FANG). Corvex Capital has a $142.8 million position in the stock, comprising 6.6% of its 13F portfolio. The second most bullish fund manager is Point72 Asset Management, led by Steve Cohen, holding a $86.3 million position; 0.5% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that hold long positions encompass Ken Griffin's Citadel Investment Group, Israel Englander's Millennium Management and Clint Carlson's Carlson Capital. In terms of the portfolio weights assigned to each position Corvex Capital allocated the biggest weight to Diamondback Energy Inc (NASDAQ:FANG), around 6.58% of its 13F portfolio. SIR Capital Management is also relatively very bullish on the stock, setting aside 5.3 percent of its 13F equity portfolio to FANG.
Judging by the fact that Diamondback Energy Inc (NASDAQ:FANG) has experienced bearish sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of hedge funds that decided to sell off their positions entirely in the third quarter. At the top of the heap, Brandon Haley's Holocene Advisors dumped the largest stake of all the hedgies tracked by Insider Monkey, worth about $35 million in stock, and Principal Global Investors's Columbus Circle Investors was right behind this move, as the fund dropped about $18.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Diamondback Energy Inc (NASDAQ:FANG) but similarly valued. We will take a look at Celanese Corporation (NYSE:CE), CNH Industrial NV (NYSE:CNHI), Evergy, Inc. (NYSE:EVRG), and Cardinal Health, Inc. (NYSE:CAH). This group of stocks' market valuations are similar to FANG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CE,31,924932,10 CNHI,16,333220,-1 EVRG,25,942248,-2 CAH,34,667856,6 Average,26.5,717064,3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $717 million. That figure was $713 million in FANG's case. Cardinal Health, Inc. (NYSE:CAH) is the most popular stock in this table. On the other hand CNH Industrial NV (NYSE:CNHI) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Diamondback Energy Inc (NASDAQ:FANG) is more popular among hedge funds. 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. These stocks lost 22.3% in 2020 through March 16th and still beat the market by 3.2 percentage points. Unfortunately FANG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FANG were disappointed as the stock returned -74.5% during the first two and a half months of 2020 (through March 16th) 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 in Q1.
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.