We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Minerals Technologies Inc (NYSE:MTX).
Minerals Technologies Inc (NYSE:MTX) investors should pay attention to a decrease in activity from the world's largest hedge funds in recent months. MTX was in 14 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 19 hedge funds in our database with MTX holdings at the end of the previous quarter. Our calculations also showed that MTX isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 S&P 500 ETFs by 41 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.
[caption id="attachment_193003" align="aligncenter" width="400"] Chuck Royce of Royce & Associates[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind let's check out the key hedge fund action regarding Minerals Technologies Inc (NYSE:MTX).
Hedge fund activity in Minerals Technologies Inc (NYSE:MTX)
Heading into the first quarter of 2020, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -26% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in MTX a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Minerals Technologies Inc (NYSE:MTX), with a stake worth $37.7 million reported as of the end of September. Trailing Royce & Associates was AQR Capital Management, which amassed a stake valued at $17 million. Arrowstreet Capital, GAMCO Investors, 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 Royce & Associates allocated the biggest weight to Minerals Technologies Inc (NYSE:MTX), around 0.34% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, dishing out 0.2 percent of its 13F equity portfolio to MTX.
Seeing as Minerals Technologies Inc (NYSE:MTX) has witnessed a decline in interest from hedge fund managers, logic holds that there lies a certain "tier" of hedge funds who sold off their entire stakes heading into Q4. Intriguingly, Donald Sussman's Paloma Partners said goodbye to the largest position of the 750 funds watched by Insider Monkey, totaling an estimated $1 million in stock, and Benjamin A. Smith's Laurion Capital Management was right behind this move, as the fund dropped about $0.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds heading into Q4.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Minerals Technologies Inc (NYSE:MTX) but similarly valued. These stocks are TransAlta Corporation (NYSE:TAC), National Storage Affiliates Trust (NYSE:NSA), Callaway Golf Company (NYSE:ELY), and Walker & Dunlop Inc. (NYSE:WD). This group of stocks' market valuations are similar to MTX's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TAC,10,47175,3 NSA,11,82641,-6 ELY,20,269683,0 WD,25,101505,9 Average,16.5,125251,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $125 million. That figure was $103 million in MTX's case. Walker & Dunlop Inc. (NYSE:WD) is the most popular stock in this table. On the other hand TransAlta Corporation (NYSE:TAC) is the least popular one with only 10 bullish hedge fund positions. Minerals Technologies Inc (NYSE:MTX) 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately MTX wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MTX investors were disappointed as the stock returned -37.5% during the same time 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 most of these stocks already outperformed the market in 2020. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.