At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Delek US Holdings, Inc. (NYSE:DK) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Delek US Holdings, Inc. (NYSE:DK) a worthy investment right now? Investors who are in the know were in an optimistic mood. The number of long hedge fund positions improved by 4 in recent months. Delek US Holdings, Inc. (NYSE:DK) was in 20 hedge funds' portfolios at the end of June. The all time high for this statistics is 31. Our calculations also showed that DK isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 58 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.
Israel Englander of Millennium Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we're going to take a glance at the key hedge fund action regarding Delek US Holdings, Inc. (NYSE:DK).
How are hedge funds trading Delek US Holdings, Inc. (NYSE:DK)?
At second quarter's end, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DK over the last 20 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Carl Icahn's Icahn Capital LP has the number one position in Delek US Holdings, Inc. (NYSE:DK), worth close to $183.5 million, comprising 0.9% of its total 13F portfolio. Sitting at the No. 2 spot is Fisher Asset Management, led by Ken Fisher, holding a $12.9 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that are bullish include Vince Maddi and Shawn Brennan's SIR Capital Management, Israel Englander's Millennium Management and Steve Pattyn's Yaupon Capital. In terms of the portfolio weights assigned to each position SIR Capital Management allocated the biggest weight to Delek US Holdings, Inc. (NYSE:DK), around 2.83% of its 13F portfolio. Yaupon Capital is also relatively very bullish on the stock, designating 2.56 percent of its 13F equity portfolio to DK.
With a general bullishness amongst the heavyweights, key hedge funds have jumped into Delek US Holdings, Inc. (NYSE:DK) headfirst. SIR Capital Management, managed by Vince Maddi and Shawn Brennan, established the largest position in Delek US Holdings, Inc. (NYSE:DK). SIR Capital Management had $11.6 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also initiated a $2.9 million position during the quarter. The other funds with brand new DK positions are Donald Sussman's Paloma Partners, Greg Eisner's Engineers Gate Manager, and Paul Tudor Jones's Tudor Investment Corp.
Let's go over hedge fund activity in other stocks similar to Delek US Holdings, Inc. (NYSE:DK). We will take a look at Red Rock Resorts, Inc. (NASDAQ:RRR), American Woodmark Corporation (NASDAQ:AMWD), CorVel Corporation (NASDAQ:CRVL), Azul S.A. (NYSE:AZUL), The Macerich Company (NYSE:MAC), Gentherm Inc (NASDAQ:THRM), and The Bank of N.T. Butterfield & Son Limited (NYSE:NTB). This group of stocks' market caps are closest to DK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RRR,30,243581,5 AMWD,16,38103,5 CRVL,15,109671,3 AZUL,13,53616,5 MAC,20,75996,-1 THRM,13,68323,2 NTB,15,64066,-3 Average,17.4,93337,2.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.4 hedge funds with bullish positions and the average amount invested in these stocks was $93 million. That figure was $235 million in DK's case. Red Rock Resorts, Inc. (NASDAQ:RRR) is the most popular stock in this table. On the other hand Azul S.A. (NYSE:AZUL) is the least popular one with only 13 bullish hedge fund positions. Delek US Holdings, Inc. (NYSE:DK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DK is 28.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately DK wasn't nearly as popular as these 10 stocks and hedge funds that were betting on DK were disappointed as the stock returned -34.9% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.