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We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Barnes Group Inc. (NYSE:B).
Barnes Group Inc. (NYSE:B) shareholders have witnessed a decrease in activity from the world's largest hedge funds recently. B was in 11 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 16 hedge funds in our database with B holdings at the end of the previous quarter. Our calculations also showed that B isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 S&P 500 ETFs by 41 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.
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Noam Gottesman of GLG Partners[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's check out the recent hedge fund action regarding Barnes Group Inc. (NYSE:B).
What does smart money think about Barnes Group Inc. (NYSE:B)?
At the end of the fourth quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -31% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in B a year ago. With hedgies' capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
The largest stake in Barnes Group Inc. (NYSE:B) was held by Fisher Asset Management, which reported holding $12.3 million worth of stock at the end of September. It was followed by D E Shaw with a $7 million position. Other investors bullish on the company included GLG Partners, Holocene Advisors, and Weld Capital Management. In terms of the portfolio weights assigned to each position Weld Capital Management allocated the biggest weight to Barnes Group Inc. (NYSE:B), around 0.21% of its 13F portfolio. AlphaCrest Capital Management is also relatively very bullish on the stock, designating 0.04 percent of its 13F equity portfolio to B.
Judging by the fact that Barnes Group Inc. (NYSE:B) has faced falling interest from hedge fund managers, it's easy to see that there is a sect of fund managers that elected to cut their full holdings heading into Q4. It's worth mentioning that Donald Sussman's Paloma Partners said goodbye to the biggest position of the "upper crust" of funds monitored by Insider Monkey, comprising close to $0.7 million in stock, and Qing Li's Sciencast Management was right behind this move, as the fund said goodbye to about $0.6 million worth. These moves are interesting, as total hedge fund interest dropped by 5 funds heading into Q4.
Let's now review hedge fund activity in other stocks similar to Barnes Group Inc. (NYSE:B). These stocks are Cedar Fair, L.P. (NYSE:FUN), Spectrum Brands Holdings, Inc. (NYSE:SPB), Select Medical Holdings Corporation (NYSE:SEM), and Sunstone Hotel Investors Inc (NYSE:SHO). This group of stocks' market valuations resemble B's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FUN,9,80652,-4 SPB,45,556205,9 SEM,21,127591,1 SHO,22,270985,-3 Average,24.25,258858,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $259 million. That figure was $27 million in B's case. Spectrum Brands Holdings, Inc. (NYSE:SPB) is the most popular stock in this table. On the other hand Cedar Fair, L.P. (NYSE:FUN) is the least popular one with only 9 bullish hedge fund positions. Barnes Group Inc. (NYSE:B) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately B wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); B investors were disappointed as the stock returned -35.8% during the same time period 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 most of these stocks already outperformed the market in 2020.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.