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 Royal Caribbean Cruises Ltd. (NYSE:RCL) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Royal Caribbean Cruises Ltd. (NYSE:RCL) has experienced an increase in support from the world's most elite money managers lately. Royal Caribbean Cruises Ltd. (NYSE:RCL) was in 31 hedge funds' portfolios at the end of June. The all time high for this statistics is 52. There were 25 hedge funds in our database with RCL positions at the end of the first quarter. Our calculations also showed that RCL 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.
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 S&P 500 ETFs by more than 56 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
David E. Shaw of D.E. Shaw
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we're going to analyze the recent hedge fund action encompassing Royal Caribbean Cruises Ltd. (NYSE:RCL).
Hedge fund activity in Royal Caribbean Cruises Ltd. (NYSE:RCL)
At the end of the second quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards RCL over the last 20 quarters. With the smart money's capital changing hands, there exists a few key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
The largest stake in Royal Caribbean Cruises Ltd. (NYSE:RCL) was held by D E Shaw, which reported holding $166.9 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $78.6 million position. Other investors bullish on the company included Eminence Capital, Scopus Asset Management, and D E Shaw. In terms of the portfolio weights assigned to each position Axel Capital Management allocated the biggest weight to Royal Caribbean Cruises Ltd. (NYSE:RCL), around 3.41% of its 13F portfolio. Shannon River Fund Management is also relatively very bullish on the stock, dishing out 2.79 percent of its 13F equity portfolio to RCL.
As aggregate interest increased, some big names were leading the bulls' herd. Shannon River Fund Management, managed by Spencer M. Waxman, assembled the largest position in Royal Caribbean Cruises Ltd. (NYSE:RCL). Shannon River Fund Management had $21.3 million invested in the company at the end of the quarter. Brett Barakett's Tremblant Capital also initiated a $20.8 million position during the quarter. The other funds with brand new RCL positions are Jack Woodruff's Candlestick Capital Management, Charles Clough's Clough Capital Partners, and John Brennan's Sirios Capital Management.
Let's also examine hedge fund activity in other stocks similar to Royal Caribbean Cruises Ltd. (NYSE:RCL). These stocks are Avalara, Inc. (NYSE:AVLR), CBOE Global Markets Inc (NASDAQ:CBOE), Huazhu Group Limited (NASDAQ:HTHT), Icahn Enterprises LP (NASDAQ:IEP), Franklin Resources, Inc. (NYSE:BEN), Essential Utilities Inc (NYSE:WTRG), and Cincinnati Financial Corporation (NASDAQ:CINF). This group of stocks' market values are similar to RCL's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AVLR,37,1446149,3 CBOE,32,840386,-6 HTHT,17,381209,0 IEP,3,9994902,0 BEN,36,410167,4 WTRG,15,536751,-8 CINF,20,604548,-11 Average,22.9,2030587,-2.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.9 hedge funds with bullish positions and the average amount invested in these stocks was $2031 million. That figure was $381 million in RCL's case. Avalara, Inc. (NYSE:AVLR) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 3 bullish hedge fund positions. Royal Caribbean Cruises Ltd. (NYSE:RCL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for RCL is 69.1. 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. 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 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. Hedge funds were also right about betting on RCL as the stock returned 41% during Q3 (through September 14th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.