"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Summit Materials Inc (NYSE:SUM) and see how it was affected.
Summit Materials Inc (NYSE:SUM) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 22 hedge funds' portfolios at the end of the second 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 DiamondRock Hospitality Company (NYSE:DRH), WesBanco, Inc. (NASDAQ:WSBC), and Insight Enterprises, Inc. (NASDAQ:NSIT) to gather more data points. Our calculations also showed that SUM isn't among the 30 most popular stocks among hedge funds (view the video below). 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 former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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 key hedge fund action surrounding Summit Materials Inc (NYSE:SUM).
What does smart money think about Summit Materials Inc (NYSE:SUM)?
At the end of the second quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SUM over the last 16 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
More specifically, Southeastern Asset Management was the largest shareholder of Summit Materials Inc (NYSE:SUM), with a stake worth $246.8 million reported as of the end of March. Trailing Southeastern Asset Management was Adage Capital Management, which amassed a stake valued at $125.3 million. GMT Capital, Wallace R. Weitz & Co., and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as Summit Materials Inc (NYSE:SUM) has faced falling interest from hedge fund managers, we can see that there is a sect of fund managers who sold off their entire stakes heading into Q3. At the top of the heap, Jonathan Barrett and Paul Segal's Luminus Management sold off the largest investment of the "upper crust" of funds followed by Insider Monkey, totaling an estimated $7.3 million in stock, and Louis Bacon's Moore Global Investments was right behind this move, as the fund sold off about $3.2 million worth. These moves are interesting, as aggregate 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 similar to Summit Materials Inc (NYSE:SUM). These stocks are DiamondRock Hospitality Company (NYSE:DRH), WesBanco, Inc. (NASDAQ:WSBC), Insight Enterprises, Inc. (NASDAQ:NSIT), and Zogenix, Inc. (NASDAQ:ZGNX). This group of stocks' market valuations are similar to SUM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DRH,17,177431,4 WSBC,10,73062,2 NSIT,14,121508,-3 ZGNX,28,1046228,-9 Average,17.25,354557,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $355 million. That figure was $557 million in SUM's case. Zogenix, Inc. (NASDAQ:ZGNX) is the most popular stock in this table. On the other hand WesBanco, Inc. (NASDAQ:WSBC) is the least popular one with only 10 bullish hedge fund positions. Summit Materials Inc (NYSE:SUM) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on SUM as the stock returned 15.3% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.