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). 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 Forum Energy Technologies Inc (NYSE:FET) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Forum Energy Technologies Inc (NYSE:FET) investors should pay attention to a decrease in hedge fund sentiment lately. FET was in 12 hedge funds' portfolios at the end of the first quarter of 2020. There were 16 hedge funds in our database with FET positions at the end of the previous quarter. Our calculations also showed that FET isn't among the 30 most popular stocks among hedge funds (click for Q1 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 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. 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.
[caption id="attachment_30621" align="aligncenter" width="396"] Cliff Asness of AQR Capital Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we're going to take a look at the new hedge fund action surrounding Forum Energy Technologies Inc (NYSE:FET).
Hedge fund activity in Forum Energy Technologies Inc (NYSE:FET)
At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from one quarter earlier. By comparison, 16 hedge funds held shares or bullish call options in FET a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, D E Shaw held the most valuable stake in Forum Energy Technologies Inc (NYSE:FET), which was worth $0.3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $0.1 million worth of shares. AQR Capital Management, Citadel Investment Group, and Two Sigma Advisors 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 Diametric Capital allocated the biggest weight to Forum Energy Technologies Inc (NYSE:FET), around 0.07% of its 13F portfolio. Tudor Investment Corp is also relatively very bullish on the stock, earmarking 0.0044 percent of its 13F equity portfolio to FET.
Due to the fact that Forum Energy Technologies Inc (NYSE:FET) has faced bearish sentiment from hedge fund managers, it's easy to see that there lies a certain "tier" of fund managers who were dropping their positions entirely last quarter. At the top of the heap, Israel Englander's Millennium Management sold off the biggest stake of all the hedgies watched by Insider Monkey, valued at close to $3.2 million in stock, and Dmitry Balyasny's Balyasny Asset Management was right behind this move, as the fund dropped about $3.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Forum Energy Technologies Inc (NYSE:FET) but similarly valued. We will take a look at Caladrius Biosciences Inc (NASDAQ:CLBS), Destination XL Group Inc (NASDAQ:DXLG), Image Sensing Systems, Inc. (NASDAQ:ISNS), and Usio, Inc. (NASDAQ:USIO). This group of stocks' market caps resemble FET's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CLBS,1,769,0 DXLG,7,6520,0 ISNS,1,782,0 USIO,1,40,0 Average,2.5,2028,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 2.5 hedge funds with bullish positions and the average amount invested in these stocks was $2 million. That figure was $1 million in FET's case. Destination XL Group Inc (NASDAQ:DXLG) is the most popular stock in this table. On the other hand Caladrius Biosciences Inc (NASDAQ:CLBS) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Forum Energy Technologies Inc (NYSE:FET) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on FET as the stock returned 194.4% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.