The elite funds run by legendary investors such as David Tepper and Dan Loeb make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don't follow. Because of their pay structures, they have strong incentives to do the research necessary to beat the market. That's why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at Freeport-McMoRan Inc. (NYSE:FCX) from the perspective of those elite 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 fresh hedge fund action encompassing Freeport-McMoRan Inc. (NYSE:FCX).
How are hedge funds trading Freeport-McMoRan Inc. (NYSE:FCX)?
At the end of the first quarter, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -2% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in FCX over the last 15 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
Among these funds, Icahn Capital LP held the most valuable stake in Freeport-McMoRan Inc. (NYSE:FCX), which was worth $570.5 million at the end of the first quarter. On the second spot was Fisher Asset Management which amassed $333.8 million worth of shares. Moreover, Citadel Investment Group, Adage Capital Management, and Millennium Management were also bullish on Freeport-McMoRan Inc. (NYSE:FCX), allocating a large percentage of their portfolios to this stock.
Seeing as Freeport-McMoRan Inc. (NYSE:FCX) has experienced a decline in interest from the smart money, it's safe to say that there was a specific group of fund managers who were dropping their positions entirely heading into Q3. Interestingly, David Cohen and Harold Levy's Iridian Asset Management said goodbye to the biggest stake of all the hedgies monitored by Insider Monkey, totaling close to $83.1 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also sold off its stock, about $32.2 million worth. These moves are important to note, as total hedge fund interest fell by 1 funds heading into Q3.
Let's check out hedge fund activity in other stocks similar to Freeport-McMoRan Inc. (NYSE:FCX). We will take a look at Cerner Corporation (NASDAQ:CERN), International Paper Company (NYSE:IP), Liberty Global plc (NASDAQ:LBTYA), and Veeva Systems Inc (NYSE:VEEV). This group of stocks' market values are similar to FCX's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CERN,29,828412,7 IP,29,250823,-5 LBTYA,28,1332379,-4 VEEV,27,654411,-4 Average,28.25,766506,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $767 million. That figure was $1414 million in FCX's case. Cerner Corporation (NASDAQ:CERN) is the most popular stock in this table. On the other hand Veeva Systems Inc (NYSE:VEEV) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Freeport-McMoRan Inc. (NYSE:FCX) is more popular among hedge funds. 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 FCX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FCX were disappointed as the stock returned -23.5% during the same 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 in Q2.
Disclosure: None. This article was originally published at Insider Monkey.