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Do Hedge Funds Love Ternium S.A. (TX)?

Debasis Saha

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Ternium S.A. (NYSE:TX).

Ternium S.A. (NYSE:TX) has experienced a decrease in support from the world's most elite money managers recently. Our calculations also showed that TX 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.

5 Most Popular Stocks Among Hedge Funds

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 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 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.

[caption id="attachment_27480" align="alignnone" width="600"] Israel Englander of Millennium Management[/caption]

Izzy Englander of MILLENNIUM MANAGEMENT

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's take a peek at the new hedge fund action encompassing Ternium S.A. (NYSE:TX).

Hedge fund activity in Ternium S.A. (NYSE:TX)

At Q3's end, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -43% from the previous quarter. On the other hand, there were a total of 14 hedge funds with a bullish position in TX a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is TX A Good Stock To Buy?

Among these funds, Contrarian Capital held the most valuable stake in Ternium S.A. (NYSE:TX), which was worth $34.5 million at the end of the third quarter. On the second spot was Millennium Management which amassed $6.9 million worth of shares. Renaissance Technologies, Dalton Investments, and D E Shaw 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 Contrarian Capital allocated the biggest weight to Ternium S.A. (NYSE:TX), around 3.15% of its 13F portfolio. Dalton Investments is also relatively very bullish on the stock, dishing out 2.01 percent of its 13F equity portfolio to TX.

Judging by the fact that Ternium S.A. (NYSE:TX) has faced a decline in interest from the aggregate hedge fund industry, it's safe to say that there exists a select few funds who were dropping their entire stakes heading into Q4. Intriguingly, Ken Griffin's Citadel Investment Group sold off the biggest stake of the 750 funds watched by Insider Monkey, worth close to $2.7 million in stock, and Louis Bacon's Moore Global Investments was right behind this move, as the fund dropped about $2.1 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 6 funds heading into Q4.

Let's also examine hedge fund activity in other stocks similar to Ternium S.A. (NYSE:TX). These stocks are Cyberark Software Ltd (NASDAQ:CYBR), DCP Midstream LP (NYSE:DCP), Cameco Corporation (NYSE:CCJ), and SLM Corp (NASDAQ:SLM). This group of stocks' market caps resemble TX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CYBR,18,257050,-1 DCP,3,8420,1 CCJ,25,384721,1 SLM,25,501007,-7 Average,17.75,287800,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $288 million. That figure was $52 million in TX's case. Cameco Corporation (NYSE:CCJ) is the most popular stock in this table. On the other hand DCP Midstream LP (NYSE:DCP) is the least popular one with only 3 bullish hedge fund positions. Ternium S.A. (NYSE:TX) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on TX as the stock returned 12.4% during the first two months of Q4 and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.

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