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Was The Smart Money Right About Transocean Ltd (RIG)?

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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 Transocean Ltd (NYSE:RIG).

Transocean Ltd (NYSE:RIG) has seen an increase in hedge fund interest of late. Transocean Ltd (NYSE:RIG) was in 27 hedge funds' portfolios at the end of June. The all time high for this statistic is 42. There were 20 hedge funds in our database with RIG positions at the end of the first quarter. Our calculations also showed that RIG isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

In today’s marketplace there are many methods stock market investors have at their disposal to appraise publicly traded companies. A duo of the best methods are hedge fund and insider trading indicators. Our researchers have shown that, historically, those who follow the best picks of the best fund managers can outclass their index-focused peers by a solid margin (see the details here). Also, our monthly newsletter's portfolio of long stock picks returned 185.4% since March 2017 (through August 2021) and beat the S&P 500 Index by more than 79 percentage points. You can download a sample issue of this newsletter on our website.

Scott Bessent of Key Square Capital Management
Scott Bessent of Key Square Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we're going to view the fresh hedge fund action regarding Transocean Ltd (NYSE:RIG).

Do Hedge Funds Think RIG Is A Good Stock To Buy Now?

At the end of June, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 35% from the first quarter of 2020. By comparison, 21 hedge funds held shares or bullish call options in RIG a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is RIG A Good Stock To Buy?
Is RIG A Good Stock To Buy?

Among these funds, D E Shaw held the most valuable stake in Transocean Ltd (NYSE:RIG), which was worth $113.5 million at the end of the second quarter. On the second spot was Two Sigma Advisors which amassed $48.3 million worth of shares. Millennium Management, Key Square Capital Management, and Discovery Capital Management 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 Avenue Capital allocated the biggest weight to Transocean Ltd (NYSE:RIG), around 4.5% of its 13F portfolio. Key Square Capital Management is also relatively very bullish on the stock, earmarking 4.41 percent of its 13F equity portfolio to RIG.

With a general bullishness amongst the heavyweights, some big names were breaking ground themselves. Key Square Capital Management, managed by Scott Bessent, assembled the biggest position in Transocean Ltd (NYSE:RIG). Key Square Capital Management had $23.3 million invested in the company at the end of the quarter. Mark Coe's Intrinsic Edge Capital also initiated a $3.4 million position during the quarter. The other funds with new positions in the stock are Israel Englander's Millennium Management, Matthew Hulsizer's PEAK6 Capital Management, and Paul Marshall and Ian Wace's Marshall Wace LLP.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Transocean Ltd (NYSE:RIG) but similarly valued. These stocks are Wolverine World Wide, Inc. (NYSE:WWW), Herman Miller, Inc. (NASDAQ:MLHR), Matson Inc. (NYSE:MATX), Cactus, Inc. (NYSE:WHD), United Community Banks Inc (NASDAQ:UCBI), Baozun Inc (NASDAQ:BZUN), and PureCycle Technologies, Inc. (NASDAQ:PCT). This group of stocks' market values are closest to RIG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WWW,21,162511,5 MLHR,23,224828,5 MATX,14,30657,-5 WHD,14,109617,-6 UCBI,13,33685,2 BZUN,8,21760,-3 PCT,22,637995,1 Average,16.4,174436,-0.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.4 hedge funds with bullish positions and the average amount invested in these stocks was $174 million. That figure was $313 million in RIG's case. Herman Miller, Inc. (NASDAQ:MLHR) is the most popular stock in this table. On the other hand Baozun Inc (NASDAQ:BZUN) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Transocean Ltd (NYSE:RIG) is more popular among hedge funds. Our overall hedge fund sentiment score for RIG is 79.3. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and still beat the market by 3.1 percentage points. Unfortunately RIG wasn't nearly as popular as these 5 stocks and hedge funds that were betting on RIG were disappointed as the stock returned -20.8% since the end of the second quarter (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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