How do you pick the next stock to invest in? One way would be to spend hours 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 BHP Group (NYSE:BHP).
Hedge fund interest in BHP Group (NYSE:BHP) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare BHP to other stocks including SAP SE (NYSE:SAP), Philip Morris International Inc. (NYSE:PM), and NIKE, Inc. (NYSE:NKE) to get a better sense of its popularity.
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 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.
[caption id="attachment_758446" align="aligncenter" width="450"] Michael Hintze of CQS Capital[/caption]
We're going to review the fresh hedge fund action surrounding BHP Group (NYSE:BHP).
What have hedge funds been doing with BHP Group (NYSE:BHP)?
Heading into the second quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in BHP over the last 15 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Ken Fisher's Fisher Asset Management has the biggest position in BHP Group (NYSE:BHP), worth close to $312.8 million, accounting for 0.4% of its total 13F portfolio. The second most bullish fund manager is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $127 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Remaining peers that hold long positions contain John Overdeck and David Siegel's Two Sigma Advisors, D. E. Shaw's D E Shaw and Michael Hintze's CQS Cayman LP.
Because BHP Group (NYSE:BHP) has witnessed a decline in interest from the aggregate hedge fund industry, it's safe to say that there was a specific group of hedge funds that elected to cut their entire stakes last quarter. At the top of the heap, Kenneth Mario Garschina's Mason Capital Management cut the biggest investment of all the hedgies watched by Insider Monkey, valued at an estimated $101.9 million in stock. Ben Levine, Andrew Manuel and Stefan Renold's fund, LMR Partners, also said goodbye to its stock, about $81.6 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks similar to BHP Group (NYSE:BHP). These stocks are SAP SE (NYSE:SAP), Philip Morris International Inc. (NYSE:PM), NIKE, Inc. (NYSE:NKE), and Adobe Incorporated (NASDAQ:ADBE). All of these stocks' market caps resemble BHP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SAP,8,1173668,-6 PM,43,3989796,-5 NKE,53,1767916,-8 ADBE,86,8965741,2 Average,47.5,3974280,-4.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 47.5 hedge funds with bullish positions and the average amount invested in these stocks was $3974 million. That figure was $638 million in BHP's case. Adobe Incorporated (NASDAQ:ADBE) is the most popular stock in this table. On the other hand SAP SE (NYSE:SAP) is the least popular one with only 8 bullish hedge fund positions. BHP Group (NYSE:BHP) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately BHP wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BHP investors were disappointed as the stock returned 1.9% 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.