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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Innospec Inc. (NASDAQ:IOSP)? The smart money sentiment can provide an answer to this question.
Is IOSP a good stock to buy now? Innospec Inc. (NASDAQ:IOSP) was in 21 hedge funds' portfolios at the end of September. The all time high for this statistic is 20. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. IOSP has seen an increase in support from the world's most elite money managers in recent months. There were 18 hedge funds in our database with IOSP positions at the end of the second quarter. Our calculations also showed that IOSP isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
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 S&P 500 ETFs by more than 66 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 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 stocks that are in our short portfolio.
Joe Huber of Huber Capital Management
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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind we're going to take a glance at the latest hedge fund action surrounding Innospec Inc. (NASDAQ:IOSP).
Do Hedge Funds Think IOSP Is A Good Stock To Buy Now?
At the end of the third quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in IOSP over the last 21 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Royce & Associates held the most valuable stake in Innospec Inc. (NASDAQ:IOSP), which was worth $42.8 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $9.8 million worth of shares. Renaissance Technologies, Huber Capital Management, and GLG Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Innospec Inc. (NASDAQ:IOSP), around 1.18% of its 13F portfolio. Huber Capital Management is also relatively very bullish on the stock, dishing out 1.02 percent of its 13F equity portfolio to IOSP.
With a general bullishness amongst the heavyweights, key money managers were leading the bulls' herd. Millennium Management, managed by Israel Englander, created the biggest position in Innospec Inc. (NASDAQ:IOSP). Millennium Management had $1.4 million invested in the company at the end of the quarter. Matthew Hulsizer's PEAK6 Capital Management also made a $0.4 million investment in the stock during the quarter. The other funds with brand new IOSP positions are Paul Tudor Jones's Tudor Investment Corp, Bruce Kovner's Caxton Associates LP, and Michael Gelband's ExodusPoint Capital.
Let's go over hedge fund activity in other stocks similar to Innospec Inc. (NASDAQ:IOSP). These stocks are USANA Health Sciences, Inc. (NYSE:USNA), Baozun Inc (NASDAQ:BZUN), SeaWorld Entertainment Inc (NYSE:SEAS), Mueller Industries, Inc. (NYSE:MLI), Viela Bio, Inc. (NASDAQ:VIE), Y-mAbs Therapeutics, Inc. (NASDAQ:YMAB), and Sapiens International Corporation N.V. (NASDAQ:SPNS). All of these stocks' market caps are similar to IOSP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position USNA,18,202824,-1 BZUN,21,72825,6 SEAS,32,797374,5 MLI,20,185077,2 VIE,5,145172,-3 YMAB,10,113072,-3 SPNS,11,50259,5 Average,16.7,223800,1.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.7 hedge funds with bullish positions and the average amount invested in these stocks was $224 million. That figure was $74 million in IOSP's case. SeaWorld Entertainment Inc (NYSE:SEAS) is the most popular stock in this table. On the other hand Viela Bio, Inc. (NASDAQ:VIE) is the least popular one with only 5 bullish hedge fund positions. Innospec Inc. (NASDAQ:IOSP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for IOSP is 67.6. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on IOSP as the stock returned 35.3% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.