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How do you pick the next stock to invest in? One way would be to spend days 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 CF Industries Holdings, Inc. (NYSE:CF) and determine whether hedge funds had an edge regarding this stock.
CF Industries Holdings, Inc. (NYSE:CF) shareholders have witnessed an increase in support from the world's most elite money managers recently. CF Industries Holdings, Inc. (NYSE:CF) was in 37 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 50. Our calculations also showed that CF isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Phillip Gross of Adage Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let's analyze the recent hedge fund action regarding CF Industries Holdings, Inc. (NYSE:CF).
What have hedge funds been doing with CF Industries Holdings, Inc. (NYSE:CF)?
At Q2's end, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CF over the last 20 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in CF Industries Holdings, Inc. (NYSE:CF) was held by D E Shaw, which reported holding $104.8 million worth of stock at the end of September. It was followed by Glendon Capital Management with a $99.7 million position. Other investors bullish on the company included Greenhaven Associates, Adage Capital Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Glendon Capital Management allocated the biggest weight to CF Industries Holdings, Inc. (NYSE:CF), around 26.25% of its 13F portfolio. Moon Capital is also relatively very bullish on the stock, dishing out 6.53 percent of its 13F equity portfolio to CF.
As one would reasonably expect, specific money managers have jumped into CF Industries Holdings, Inc. (NYSE:CF) headfirst. Greenhaven Associates, managed by Edgar Wachenheim, created the largest position in CF Industries Holdings, Inc. (NYSE:CF). Greenhaven Associates had $97.3 million invested in the company at the end of the quarter. Michael Cowley's Sandbar Asset Management also initiated a $5.9 million position during the quarter. The other funds with new positions in the stock are Noam Gottesman's GLG Partners, C. Jonathan Gattman's Cloverdale Capital Management, and Greg Eisner's Engineers Gate Manager.
Let's now review hedge fund activity in other stocks similar to CF Industries Holdings, Inc. (NYSE:CF). We will take a look at AECOM (NYSE:ACM), Owens Corning (NYSE:OC), Vroom, Inc. (NASDAQ:VRM), ANGI Homeservices Inc (NASDAQ:ANGI), Manhattan Associates, Inc. (NASDAQ:MANH), Canopy Growth Corporation (NYSE:CGC), and Post Holdings Inc (NYSE:POST). This group of stocks' market valuations match CF's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ACM,38,664429,-1 OC,37,576140,7 VRM,28,310338,28 ANGI,48,667972,21 MANH,15,287947,-5 CGC,11,10644,1 POST,34,1240001,3 Average,30.1,536782,7.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 30.1 hedge funds with bullish positions and the average amount invested in these stocks was $537 million. That figure was $548 million in CF's case. ANGI Homeservices Inc (NASDAQ:ANGI) is the most popular stock in this table. On the other hand Canopy Growth Corporation (NYSE:CGC) is the least popular one with only 11 bullish hedge fund positions. CF Industries Holdings, Inc. (NYSE:CF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CF is 65.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on CF, though not to the same extent, as the stock returned 17% since the end of June and outperformed the market as well.
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Disclosure: None. This article was originally published at Insider Monkey.