The market has been volatile in the last 6 months as the Federal Reserve continued its rate hikes and then abruptly reversed its stance and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 9 percentage points. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q4 and the beginning of Q1. In this article, we analyze what the smart money thinks of SeaDrill Limited (NYSE:SDRL) and find out how it is affected by hedge funds' moves.
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' 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's review the latest hedge fund action encompassing SeaDrill Limited (NYSE:SDRL).
What does the smart money think about SeaDrill Limited (NYSE:SDRL)?
At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SDRL over the last 15 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.
According to Insider Monkey's hedge fund database, Mark T. Gallogly's Centerbridge Partners has the most valuable position in SeaDrill Limited (NYSE:SDRL), worth close to $65.4 million, amounting to 9% of its total 13F portfolio. The second largest stake is held by King Street Capital, managed by Brian J. Higgins, which holds a $55.3 million position; 2.7% of its 13F portfolio is allocated to the stock. Other peers with similar optimism contain Robert Henry Lynch's Aristeia Capital, Crispin Odey's Odey Asset Management Group and David Einhorn's Greenlight Capital.
Due to the fact that SeaDrill Limited (NYSE:SDRL) has witnessed declining sentiment from the entirety of the hedge funds we track, it's easy to see that there exists a select few money managers that decided to sell off their positions entirely by the end of the third quarter. Intriguingly, Andy Redleaf's Whitebox Advisors dropped the biggest investment of the "upper crust" of funds monitored by Insider Monkey, totaling close to $5.8 million in stock, and Kenneth Tropin's Graham Capital Management was right behind this move, as the fund said goodbye to about $0.5 million worth. These transactions are important to note, as total hedge fund interest fell by 2 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to SeaDrill Limited (NYSE:SDRL). We will take a look at AdvanSix Inc. (NYSE:ASIX), Coeur Mining, Inc. (NYSE:CDE), Connecticut Water Service, Inc. (NASDAQ:CTWS), and Newpark Resources Inc (NYSE:NR). This group of stocks' market valuations are similar to SDRL's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ASIX,19,147109,0 CDE,11,25132,-2 CTWS,4,22160,-1 NR,15,42423,5 Average,12.25,59206,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $249 million in SDRL's case. AdvanSix Inc. (NYSE:ASIX) is the most popular stock in this table. On the other hand Connecticut Water Service, Inc. (NASDAQ:CTWS) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks SeaDrill Limited (NYSE:SDRL) 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 SDRL wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SDRL were disappointed as the stock returned -48.1% 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.