We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds' top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like QEP Resources Inc (NYSE:QEP).
QEP Resources Inc (NYSE:QEP) was in 18 hedge funds' portfolios at the end of June. QEP shareholders have witnessed a decrease in hedge fund interest recently. There were 23 hedge funds in our database with QEP positions at the end of the previous quarter. Our calculations also showed that QEP isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the new hedge fund action surrounding QEP Resources Inc (NYSE:QEP).
How are hedge funds trading QEP Resources Inc (NYSE:QEP)?
At the end of the second quarter, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from the first quarter of 2019. On the other hand, there were a total of 19 hedge funds with a bullish position in QEP a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Elliott Management, managed by Paul Singer, holds the number one position in QEP Resources Inc (NYSE:QEP). Elliott Management has a $84.6 million position in the stock, comprising 0.6% of its 13F portfolio. The second largest stake is held by D E Shaw, managed by D. E. Shaw, which holds a $46.4 million position; 0.1% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish encompass Israel Englander's Millennium Management, Carl Tiedemann and Michael Tiedemann's TIG Advisors and Robert Emil Zoellner's Alpine Associates.
Since QEP Resources Inc (NYSE:QEP) has faced declining sentiment from hedge fund managers, logic holds that there was a specific group of fund managers that decided to sell off their entire stakes in the second quarter. At the top of the heap, Renaissance Technologies dumped the biggest position of the "upper crust" of funds monitored by Insider Monkey, comprising an estimated $14.1 million in stock. Josh Donfeld and David Rogers's fund, Castle Hook Partners, also said goodbye to its stock, about $14 million worth. These transactions are interesting, as total hedge fund interest was cut by 5 funds in the second quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as QEP Resources Inc (NYSE:QEP) but similarly valued. We will take a look at Horace Mann Educators Corporation (NYSE:HMN), Liberty Oilfield Services Inc. (NYSE:LBRT), Audentes Therapeutics, Inc. (NASDAQ:BOLD), and Crescent Point Energy Corp (NYSE:CPG). This group of stocks' market values resemble QEP's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HMN,12,30864,-2 LBRT,7,68055,-7 BOLD,27,643203,1 CPG,12,65098,-5 Average,14.5,201805,-3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $202 million. That figure was $256 million in QEP's case. Audentes Therapeutics, Inc. (NASDAQ:BOLD) is the most popular stock in this table. On the other hand Liberty Oilfield Services Inc. (NYSE:LBRT) is the least popular one with only 7 bullish hedge fund positions. QEP Resources Inc (NYSE:QEP) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately QEP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on QEP were disappointed as the stock returned -48.6% during the third quarter 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.