U.S. Markets closed

SeaDrill Limited (SDRL) Burned These Hedge Funds

Asma UL Husna

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 20% in 2019 (through September 30th). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of 24% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like SeaDrill Limited (NYSE:SDRL).

Is SeaDrill Limited (NYSE:SDRL) a buy, sell, or hold? The best stock pickers are becoming less hopeful. The number of bullish hedge fund positions fell by 2 in recent months. Our calculations also showed that SDRL 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.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

SDRL_oct2019

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. We're going to take a peek at the key hedge fund action regarding SeaDrill Limited (NYSE:SDRL).

How are hedge funds trading SeaDrill Limited (NYSE:SDRL)?

Heading into the third quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SDRL over the last 16 quarters. With the smart money's sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Crispin Odey

More specifically, Centerbridge Partners was the largest shareholder of SeaDrill Limited (NYSE:SDRL), with a stake worth $28 million reported as of the end of March. Trailing Centerbridge Partners was King Street Capital, which amassed a stake valued at $27.7 million. Odey Asset Management Group, Aristeia Capital, and Marshall Wace LLP were also very fond of the stock, giving the stock large weights in their portfolios.

Because SeaDrill Limited (NYSE:SDRL) has faced a decline in interest from the smart money, it's easy to see that there lies a certain "tier" of money managers who sold off their entire stakes last quarter. It's worth mentioning that David Einhorn's Greenlight Capital dumped the biggest position of the "upper crust" of funds monitored by Insider Monkey, valued at close to $8.7 million in stock, and Michael Gelband's ExodusPoint Capital was right behind this move, as the fund cut about $1.9 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 2 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as SeaDrill Limited (NYSE:SDRL) but similarly valued. We will take a look at Magic Software Enterprises Ltd. (NASDAQ:MGIC), AudioCodes Ltd. (NASDAQ:AUDC), Prevail Therapeutics Inc. (NASDAQ:PRVL), and BBX Capital Corporation (NYSE:BBX). This group of stocks' market valuations are closest to SDRL's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MGIC,3,4820,1 AUDC,11,18594,-3 PRVL,11,292984,11 BBX,15,35360,-1 Average,10,87940,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $88 million. That figure was $122 million in SDRL's case. BBX Capital Corporation (NYSE:BBX) is the most popular stock in this table. On the other hand Magic Software Enterprises Ltd. (NASDAQ:MGIC) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks SeaDrill Limited (NYSE:SDRL) is more popular among hedge funds. 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 SDRL wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SDRL were disappointed as the stock returned -49.5% 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 in Q3.

Disclosure: None. This article was originally published at Insider Monkey.

Related Content