We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Covanta Holding Corporation (NYSE:CVA).
Covanta Holding Corporation (NYSE:CVA) was in 14 hedge funds' portfolios at the end of September. CVA investors should be aware of a decrease in activity from the world's largest hedge funds in recent months. There were 15 hedge funds in our database with CVA positions at the end of the previous quarter. Our calculations also showed that CVA 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.
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 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. 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_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
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. We're going to view the recent hedge fund action surrounding Covanta Holding Corporation (NYSE:CVA).
What does smart money think about Covanta Holding Corporation (NYSE:CVA)?
At Q3's end, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from one quarter earlier. By comparison, 19 hedge funds held shares or bullish call options in CVA a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Levin Capital Strategies, managed by John A. Levin, holds the most valuable position in Covanta Holding Corporation (NYSE:CVA). Levin Capital Strategies has a $43 million position in the stock, comprising 4.7% of its 13F portfolio. The second largest stake is held by Renaissance Technologies, holding a $25.1 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish encompass Bernard Lambilliotte's Ecofin Ltd, John Overdeck and David Siegel's Two Sigma Advisors and Mario Gabelli's GAMCO Investors. In terms of the portfolio weights assigned to each position Ecofin Ltd allocated the biggest weight to Covanta Holding Corporation (NYSE:CVA), around 8.95% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, setting aside 4.75 percent of its 13F equity portfolio to CVA.
Because Covanta Holding Corporation (NYSE:CVA) has experienced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there exists a select few money managers who sold off their entire stakes in the third quarter. Intriguingly, Matthew Hulsizer's PEAK6 Capital Management cut the largest position of the "upper crust" of funds tracked by Insider Monkey, worth an estimated $1.8 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund said goodbye to about $1.3 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Covanta Holding Corporation (NYSE:CVA) but similarly valued. We will take a look at Alamos Gold Inc (NYSE:AGI), Halozyme Therapeutics, Inc. (NASDAQ:HALO), Independent Bank Group Inc (NASDAQ:IBTX), and AlarmCom Holdings Inc (NASDAQ:ALRM). This group of stocks' market caps are similar to CVA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AGI,15,220502,3 HALO,24,154349,5 IBTX,12,100233,3 ALRM,18,162049,-1 Average,17.25,159283,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $159 million. That figure was $103 million in CVA's case. Halozyme Therapeutics, Inc. (NASDAQ:HALO) is the most popular stock in this table. On the other hand Independent Bank Group Inc (NASDAQ:IBTX) is the least popular one with only 12 bullish hedge fund positions. Covanta Holding Corporation (NYSE:CVA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 CVA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CVA investors were disappointed as the stock returned -14.9% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.