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. Keeping this in mind, let's take a look at whether Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) has seen a decrease in enthusiasm from smart money of late. SHI was in 3 hedge funds' portfolios at the end of December. There were 4 hedge funds in our database with SHI positions at the end of the previous quarter. Our calculations also showed that SHI 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_27676" align="aligncenter" width="348"] Israel Englander of Millennium Management[/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. Keeping this in mind let's analyze the latest hedge fund action surrounding Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI).
How are hedge funds trading Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI)?
At Q4's end, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SHI over the last 18 quarters. With hedgies' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
The largest stake in Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) was held by Renaissance Technologies, which reported holding $13.6 million worth of stock at the end of September. It was followed by Millennium Management with a $0.8 million position. The only other hedge fund that is bullish on the company was Citadel Investment Group.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Quantamental Technologies. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified SHI as a viable investment and initiated a position in the stock.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) but similarly valued. These stocks are Federated Investors Inc (NYSE:FII), Corporate Office Properties Trust (NYSE:OFC), BancorpSouth Bank (NYSE:BXS), and Home Bancshares Inc (Conway, AR) (NASDAQ:HOMB). This group of stocks' market values match SHI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FII,29,236110,2 OFC,21,165223,3 BXS,14,63010,0 HOMB,12,14017,0 Average,19,119590,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $120 million. That figure was $15 million in SHI's case. Federated Investors Inc (NYSE:FII) is the most popular stock in this table. On the other hand Home Bancshares Inc (Conway, AR) (NASDAQ:HOMB) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) is even less popular than HOMB. 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 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 managed to beat the market by 4.2 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 -20.9% 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 so far 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.