How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Sinopec Shanghai Petrochemical Co. (NYSE:SHI).
Hedge fund interest in Sinopec Shanghai Petrochemical Co. (NYSE:SHI) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Webster Financial Corporation (NYSE:WBS), Nomad Foods Limited Ordinary Shares (NYSE:NOMD), and Cameco Corporation (NYSE:CCJ) to gather more data points. Our calculations also showed that SHI isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' 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.
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 check out the latest hedge fund action regarding Sinopec Shanghai Petrochemical Co. (NYSE:SHI).
Hedge fund activity in Sinopec Shanghai Petrochemical Co. (NYSE:SHI)
Heading into the third quarter of 2019, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SHI over the last 16 quarters. With hedge funds' capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Sinopec Shanghai Petrochemical Co. (NYSE:SHI), with a stake worth $7.6 million reported as of the end of March. Trailing Renaissance Technologies was Arrowstreet Capital, which amassed a stake valued at $3.3 million. Sensato Capital Management, Citadel Investment Group, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the second quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Sinopec Shanghai Petrochemical Co. (NYSE:SHI) but similarly valued. These stocks are Webster Financial Corporation (NYSE:WBS), Nomad Foods Limited Ordinary Shares (NYSE:NOMD), Cameco Corporation (NYSE:CCJ), and Compania de Minas Buenaventura SA (NYSE:BVN). This group of stocks' market valuations resemble SHI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WBS,22,364737,-3 NOMD,32,475831,-10 CCJ,24,392412,0 BVN,7,16086,0 Average,21.25,312267,-3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $312 million. That figure was $13 million in SHI's case. Nomad Foods Limited Ordinary Shares (NYSE:NOMD) is the most popular stock in this table. On the other hand Compania de Minas Buenaventura SA (NYSE:BVN) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Sinopec Shanghai Petrochemical Co. (NYSE:SHI) is even less popular than BVN. Hedge funds dodged a bullet by taking a bearish stance towards SHI. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately SHI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SHI investors were disappointed as the stock returned -26.9% 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 in 2019.
Disclosure: None. This article was originally published at Insider Monkey.