Hedge funds and other investment firms run by legendary investors like Israel Englander, Jeffrey Talpins and Ray Dalio are entrusted to manage billions of dollars of accredited investors' money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.
Timkensteel Corp (NYSE:TMST) investors should be aware of an increase in hedge fund sentiment in recent months. TMST was in 13 hedge funds' portfolios at the end of the first quarter of 2019. There were 10 hedge funds in our database with TMST holdings at the end of the previous quarter. Our calculations also showed that TMST isn't among the 30 most popular stocks among hedge funds.
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.
Let's take a look at the key hedge fund action regarding Timkensteel Corp (NYSE:TMST).
What does smart money think about Timkensteel Corp (NYSE:TMST)?
At Q1's end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 30% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in TMST over the last 15 quarters. With hedgies' capital changing hands, there exists a few notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, Luminus Management was the largest shareholder of Timkensteel Corp (NYSE:TMST), with a stake worth $35.7 million reported as of the end of March. Trailing Luminus Management was GAMCO Investors, which amassed a stake valued at $17.9 million. Royce & Associates, D E Shaw, and Beddow Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
As aggregate interest increased, specific money managers were leading the bulls' herd. Venator Capital Management, managed by Brandon Osten, assembled the most valuable position in Timkensteel Corp (NYSE:TMST). Venator Capital Management had $0.4 million invested in the company at the end of the quarter. David Harding's Winton Capital Management also made a $0.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Tudor Jones's Tudor Investment Corp, David Costen Haley's HBK Investments, and Matthew Hulsizer's PEAK6 Capital Management.
Let's also examine hedge fund activity in other stocks similar to Timkensteel Corp (NYSE:TMST). We will take a look at Martin Midstream Partners L.P. (NASDAQ:MMLP), Antares Pharma Inc (NASDAQ:ATRS), CONSOL Coal Resources LP (NYSE:CCR), and SIGA Technologies Inc. (NASDAQ:SIGA). This group of stocks' market caps resemble TMST's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MMLP,1,204,0 ATRS,12,47084,2 CCR,5,102709,0 SIGA,16,30174,6 Average,8.5,45043,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $45 million. That figure was $76 million in TMST's case. SIGA Technologies Inc. (NASDAQ:SIGA) is the most popular stock in this table. On the other hand Martin Midstream Partners L.P. (NASDAQ:MMLP) is the least popular one with only 1 bullish hedge fund positions. Timkensteel Corp (NYSE:TMST) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 TMST wasn't nearly as popular as these 20 stocks and hedge funds that were betting on TMST were disappointed as the stock returned -29.8% 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 so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.