How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Valmont Industries, Inc. (NYSE:VMI) and determine whether hedge funds had an edge regarding this stock.
Is Valmont Industries, Inc. (NYSE:VMI) the right investment to pursue these days? The best stock pickers were becoming more confident. The number of bullish hedge fund positions went up by 3 recently. Valmont Industries, Inc. (NYSE:VMI) was in 27 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 28. Our calculations also showed that VMI 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). There were 24 hedge funds in our database with VMI holdings at the end of March. 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.
Matthew Hulsizer of PEAK6 Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. With all of this in mind we're going to review the latest hedge fund action surrounding Valmont Industries, Inc. (NYSE:VMI).
What does smart money think about Valmont Industries, Inc. (NYSE:VMI)?
Heading into the third quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in VMI over the last 20 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
More specifically, Impax Asset Management was the largest shareholder of Valmont Industries, Inc. (NYSE:VMI), with a stake worth $118.3 million reported as of the end of September. Trailing Impax Asset Management was Royce & Associates, which amassed a stake valued at $35.7 million. Nitorum Capital, Renaissance Technologies, and Marshall Wace LLP 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 Harvey Partners allocated the biggest weight to Valmont Industries, Inc. (NYSE:VMI), around 5% of its 13F portfolio. Nitorum Capital is also relatively very bullish on the stock, setting aside 1.64 percent of its 13F equity portfolio to VMI.
As aggregate interest increased, specific money managers were leading the bulls' herd. Gotham Asset Management, managed by Joel Greenblatt, established the most outsized position in Valmont Industries, Inc. (NYSE:VMI). Gotham Asset Management had $1.6 million invested in the company at the end of the quarter. Paul Tudor Jones's Tudor Investment Corp also initiated a $1 million position during the quarter. The other funds with new positions in the stock are Donald Sussman's Paloma Partners, Ran Pang's Quantamental Technologies, and Matthew Hulsizer's PEAK6 Capital Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Valmont Industries, Inc. (NYSE:VMI) but similarly valued. We will take a look at National Vision Holdings, Inc. (NASDAQ:EYE), Avista Corp (NYSE:AVA), Tegna Inc (NYSE:TGNA), Brady Corp (NYSE:BRC), Nordstrom, Inc. (NYSE:JWN), Antero Midstream Corp (NYSE:AM), and Commercial Metals Company (NYSE:CMC). This group of stocks' market valuations are similar to VMI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EYE,17,296472,3 AVA,21,105729,3 TGNA,29,318465,0 BRC,17,146373,7 JWN,28,182227,3 AM,14,116661,0 CMC,22,153574,3 Average,21.1,188500,2.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.1 hedge funds with bullish positions and the average amount invested in these stocks was $189 million. That figure was $255 million in VMI's case. Tegna Inc (NYSE:TGNA) is the most popular stock in this table. On the other hand Antero Midstream Corp (NYSE:AM) is the least popular one with only 14 bullish hedge fund positions. Valmont Industries, Inc. (NYSE:VMI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VMI is 80.3. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately VMI wasn't nearly as popular as these 10 stocks and hedge funds that were betting on VMI were disappointed as the stock returned 4.9% 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 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.