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 Marathon Oil Corporation (NYSE:MRO).
Marathon Oil Corporation (NYSE:MRO) shareholders have witnessed an increase in support from the world's most elite money managers in recent months. Our calculations also showed that MRO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_26794" align="aligncenter" width="359"] Paul Tudor Jones of Tudor Investment Corp[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a gander at the recent hedge fund action regarding Marathon Oil Corporation (NYSE:MRO).
How are hedge funds trading Marathon Oil Corporation (NYSE:MRO)?
At Q3's end, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. On the other hand, there were a total of 39 hedge funds with a bullish position in MRO a year ago. So, let's examine 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 Marathon Oil Corporation (NYSE:MRO), which was worth $82.8 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $67.6 million worth of shares. Encompass Capital Advisors, AQR Capital Management, and Millennium Management 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 Encompass Capital Advisors allocated the biggest weight to Marathon Oil Corporation (NYSE:MRO), around 2.62% of its portfolio. Arosa Capital Management is also relatively very bullish on the stock, designating 1.65 percent of its 13F equity portfolio to MRO.
As one would reasonably expect, key hedge funds were leading the bulls' herd. Deep Basin Capital, managed by Matt Smith, created the most outsized call position in Marathon Oil Corporation (NYSE:MRO). Deep Basin Capital had $12.3 million invested in the company at the end of the quarter. David Harding's Winton Capital Management also made a $8.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Vince Maddi and Shawn Brennan's SIR Capital Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, and Paul Tudor Jones's Tudor Investment Corp.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Marathon Oil Corporation (NYSE:MRO) but similarly valued. We will take a look at Comerica Incorporated (NYSE:CMA), Teradyne, Inc. (NASDAQ:TER), Datadog, Inc. (NASDAQ:DDOG), and The Western Union Company (NYSE:WU). All of these stocks' market caps are similar to MRO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CMA,28,468164,-4 TER,31,1128584,4 DDOG,39,208582,39 WU,20,413091,-3 Average,29.5,554605,9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $555 million. That figure was $395 million in MRO's case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand The Western Union Company (NYSE:WU) is the least popular one with only 20 bullish hedge fund positions. Marathon Oil Corporation (NYSE:MRO) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MRO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MRO were disappointed as the stock returned -4.6% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.