At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Tiger Global because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.
Is BHP Group (NYSE:BBL) a healthy stock for your portfolio? The smart money is becoming more confident. The number of long hedge fund bets inched up by 6 recently. Our calculations also showed that BBL isn't among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Let's take a look at the key hedge fund action regarding BHP Group (NYSE:BBL).
How are hedge funds trading BHP Group (NYSE:BBL)?
At Q1's end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 40% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in BBL over the last 15 quarters. With hedge funds' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Arrowstreet Capital was the largest shareholder of BHP Group (NYSE:BBL), with a stake worth $274.7 million reported as of the end of March. Trailing Arrowstreet Capital was Polaris Capital Management, which amassed a stake valued at $213.9 million. Fisher Asset Management, York Capital Management, and LMR Partners were also very fond of the stock, giving the stock large weights in their portfolios.
With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. York Capital Management, managed by James Dinan, created the biggest position in BHP Group (NYSE:BBL). York Capital Management had $98 million invested in the company at the end of the quarter. Jonathan Barrett and Paul Segal's Luminus Management also initiated a $13.6 million position during the quarter. The other funds with new positions in the stock are Michael Hintze's CQS Cayman LP, Paul Marshall and Ian Wace's Marshall Wace LLP, and Robert B. Gillam's McKinley Capital Management.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as BHP Group (NYSE:BBL) but similarly valued. We will take a look at Paypal Holdings Inc (NASDAQ:PYPL), DowDuPont Inc. (NYSE:DWDP), PetroChina Company Limited (NYSE:PTR), and 3M Company (NYSE:MMM). This group of stocks' market valuations are closest to BBL's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PYPL,93,3610295,-10 DWDP,61,1910098,-6 PTR,12,124953,-2 MMM,43,441353,7 Average,52.25,1521675,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 52.25 hedge funds with bullish positions and the average amount invested in these stocks was $1522 million. That figure was $948 million in BBL's case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand PetroChina Company Limited (NYSE:PTR) is the least popular one with only 12 bullish hedge fund positions. BHP Group (NYSE:BBL) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately BBL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BBL investors were disappointed as the stock returned -5.5% 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.