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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 Reliance Steel & Aluminum Co. (NYSE:RS)? The smart money sentiment can provide an answer to this question.
Is RS stock a buy? Reliance Steel & Aluminum Co. (NYSE:RS) shareholders have witnessed a decrease in enthusiasm from smart money recently. Reliance Steel & Aluminum Co. (NYSE:RS) was in 27 hedge funds' portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 34. Our calculations also showed that RS isn't among the 30 most popular stocks among hedge funds (click for Q4 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. Hedge funds have more than $3 trillion in assets under management, so you can't expect their entire portfolios to beat the market by large margins. 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 124 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds' moves today.
Lee Ainslie of Maverick Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, auto parts business is a recession resistant business, so we are taking a closer look at this discount auto parts stock that is growing at a 196% annualized rate. We go through lists like the 15 best micro-cap stocks to buy now to identify the next stock with 10x upside potential. 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. Now let's view the fresh hedge fund action encompassing Reliance Steel & Aluminum Co. (NYSE:RS).
Do Hedge Funds Think RS Is A Good Stock To Buy Now?
At fourth quarter's end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the third quarter of 2020. On the other hand, there were a total of 34 hedge funds with a bullish position in RS a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
Among these funds, Royce & Associates held the most valuable stake in Reliance Steel & Aluminum Co. (NYSE:RS), which was worth $57.2 million at the end of the fourth quarter. On the second spot was D E Shaw which amassed $49.2 million worth of shares. Millennium Management, Scopus Asset Management, and Lodge Hill Capital 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 Lodge Hill Capital allocated the biggest weight to Reliance Steel & Aluminum Co. (NYSE:RS), around 12.63% of its 13F portfolio. Scopus Asset Management is also relatively very bullish on the stock, setting aside 0.77 percent of its 13F equity portfolio to RS.
Judging by the fact that Reliance Steel & Aluminum Co. (NYSE:RS) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there is a sect of hedge funds who sold off their entire stakes heading into Q1. Intriguingly, Steve Cohen's Point72 Asset Management dropped the largest position of the "upper crust" of funds monitored by Insider Monkey, totaling about $7.2 million in stock. Parvinder Thiara's fund, Athanor Capital, also cut its stock, about $0.6 million worth. These moves are interesting, as aggregate hedge fund interest fell by 3 funds heading into Q1.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Reliance Steel & Aluminum Co. (NYSE:RS) but similarly valued. These stocks are Ritchie Bros. Auctioneers (NYSE:RBA), Sotera Health Company (NASDAQ:SHC), Jones Lang LaSalle Inc (NYSE:JLL), American Financial Group (NYSE:AFG), Ralph Lauren Corporation (NYSE:RL), Euronet Worldwide, Inc. (NASDAQ:EEFT), and Quidel Corporation (NASDAQ:QDEL). This group of stocks' market valuations are similar to RS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RBA,23,522011,2 SHC,27,321284,27 JLL,23,1093523,-2 AFG,24,276298,-3 RL,35,789522,6 EEFT,32,489029,-7 QDEL,29,401017,-13 Average,27.6,556098,1.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.6 hedge funds with bullish positions and the average amount invested in these stocks was $556 million. That figure was $365 million in RS's case. Ralph Lauren Corporation (NYSE:RL) is the most popular stock in this table. On the other hand Ritchie Bros. Auctioneers (NYSE:RBA) is the least popular one with only 23 bullish hedge fund positions. Reliance Steel & Aluminum Co. (NYSE:RS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for RS is 42.5. 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 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 12.3% in 2021 through April 19th and still beat the market by 0.9 percentage points. A small number of hedge funds were also right about betting on RS as the stock returned 30.3% since the end of the fourth quarter (through 4/19) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.