"Market conditions are changing. The continued rise in interest rates suggests we are in the early stages of a bond bear market, which could intensify as central banks withdraw liquidity. The receding tide of liquidity will start to reveal more rocks beyond what has been exposed in emerging markets so far, and the value of a value discipline will be in avoiding the biggest capital-destroying rocks. If a rock emerges on the crowded shore of U.S. momentum, it could result in a major liquidity challenge, as momentum is often most intense on the downside as a crowded trade reverses. So investors are facing a large potential trade-off right now: continue to bet on the current dominance of momentum and the S&P 500, or bet on change and take an active value bet in names with attractive value and optionality, but with negative momentum," said Clearbridge Investments in its market commentary. We aren't sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards HollyFrontier Corporation (NYSE:HFC).
HollyFrontier Corporation (NYSE:HFC) was in 25 hedge funds' portfolios at the end of the fourth quarter of 2018. HFC has experienced a decrease in support from the world's most elite money managers lately. There were 26 hedge funds in our database with HFC positions at the end of the previous quarter. Our calculations also showed that HFC isn't among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's take a look at the recent hedge fund action encompassing HollyFrontier Corporation (NYSE:HFC).
How are hedge funds trading HollyFrontier Corporation (NYSE:HFC)?
At Q4's end, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the second quarter of 2018. On the other hand, there were a total of 13 hedge funds with a bullish position in HFC a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of HollyFrontier Corporation (NYSE:HFC), with a stake worth $512.3 million reported as of the end of September. Trailing AQR Capital Management was Bridgewater Associates, which amassed a stake valued at $44.7 million. Renaissance Technologies, Millennium Management, and Winton Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because HollyFrontier Corporation (NYSE:HFC) has witnessed a decline in interest from the entirety of the hedge funds we track, it's safe to say that there lies a certain "tier" of hedge funds that elected to cut their full holdings in the third quarter. Interestingly, Jonathan Barrett and Paul Segal's Luminus Management sold off the largest investment of the "upper crust" of funds watched by Insider Monkey, comprising about $9.6 million in stock, and Rob Citrone's Discovery Capital Management was right behind this move, as the fund dumped about $8.7 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 1 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to HollyFrontier Corporation (NYSE:HFC). We will take a look at Everest Re Group Ltd (NYSE:RE), TechnipFMC plc (NYSE:FTI), Lennox International Inc. (NYSE:LII), and NVR, Inc. (NYSE:NVR). This group of stocks' market valuations are similar to HFC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RE,27,446913,13 FTI,21,428723,-2 LII,24,213167,1 NVR,31,830929,6 Average,25.75,479933,4.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $480 million. That figure was $718 million in HFC's case. NVR, Inc. (NYSE:NVR) is the most popular stock in this table. On the other hand TechnipFMC plc (NYSE:FTI) is the least popular one with only 21 bullish hedge fund positions. HollyFrontier Corporation (NYSE:HFC) 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 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately HFC wasn't in this group. Hedge funds that bet on HFC were disappointed as the stock lost 3.2% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.