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Is SM Energy Company (SM) Going To Burn These Hedge Funds ?

Nina Todic

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards SM Energy Company (NYSE:SM).

SM Energy Company (NYSE:SM) was in 20 hedge funds' portfolios at the end of September. SM investors should pay attention to an increase in activity from the world's largest hedge funds lately. There were 18 hedge funds in our database with SM positions at the end of the previous quarter. Our calculations also showed that SM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_365194" align="aligncenter" width="450"] David E. Shaw of D.E. Shaw[/caption]

David E. Shaw of D.E. Shaw

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the recent hedge fund action regarding SM Energy Company (NYSE:SM).

What does smart money think about SM Energy Company (NYSE:SM)?

At Q3's end, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from the previous quarter. On the other hand, there were a total of 25 hedge funds with a bullish position in SM a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Citadel Investment Group was the largest shareholder of SM Energy Company (NYSE:SM), with a stake worth $38.6 million reported as of the end of September. Trailing Citadel Investment Group was D E Shaw, which amassed a stake valued at $13.1 million. Arrowstreet Capital, Renaissance Technologies, and Alyeska Investment Group 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 SIR Capital Management allocated the biggest weight to SM Energy Company (NYSE:SM), around 1.7% of its 13F portfolio. Deep Basin Capital is also relatively very bullish on the stock, designating 0.38 percent of its 13F equity portfolio to SM.

As aggregate interest increased, key hedge funds were leading the bulls' herd. Deep Basin Capital, managed by Matt Smith, assembled the most outsized call position in SM Energy Company (NYSE:SM). Deep Basin Capital had $4.8 million invested in the company at the end of the quarter. David Rosen's Rubric Capital Management also initiated a $2.3 million position during the quarter. The other funds with brand new SM positions are Peter Muller's PDT Partners, Michael Gelband's ExodusPoint Capital, and Andrew Weiss's Weiss Asset Management.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as SM Energy Company (NYSE:SM) but similarly valued. We will take a look at Middlesex Water Company (NASDAQ:MSEX), Standard Motor Products, Inc. (NYSE:SMP), Natus Medical Incorporated (NASDAQ:NTUS), and Kenon Holdings Ltd. (NYSE:KEN). All of these stocks' market caps are similar to SM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MSEX,10,54131,1 SMP,13,111656,2 NTUS,21,82632,-1 KEN,1,1950,0 Average,11.25,62592,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $104 million in SM's case. Natus Medical Incorporated (NASDAQ:NTUS) is the most popular stock in this table. On the other hand Kenon Holdings Ltd. (NYSE:KEN) is the least popular one with only 1 bullish hedge fund positions. SM Energy Company (NYSE:SM) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SM were disappointed as the stock returned -13.7% during the fourth quarter (through the end of November) 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.

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