U.S. Markets close in 4 hrs 31 mins

Is Summit Materials Inc (SUM) Going to Burn These Hedge Funds?

Reymerlyn Martin

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth depends on it. Regardless of the various methods used by elite investors like David Tepper and Dan Loeb, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.

Summit Materials Inc (NYSE:SUM) was in 21 hedge funds' portfolios at the end of September. SUM investors should be aware of a decrease in enthusiasm from smart money lately. There were 27 hedge funds in our database with SUM positions at the end of the previous quarter. Our calculations also showed that SUM isn't among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 18 percentage points since May 2014 through December 3, 2018 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

01 Mason Hawkins, Southeastern Asset Management

We're going to take a peek at the new hedge fund action regarding Summit Materials Inc (NYSE:SUM).

What does the smart money think about Summit Materials Inc (NYSE:SUM)?

Heading into the fourth quarter of 2018, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -22% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SUM over the last 13 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

SUM_dec2018

Among these funds, Southeastern Asset Management held the most valuable stake in Summit Materials Inc (NYSE:SUM), which was worth $168.2 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $94.1 million worth of shares. Moreover, Three Bays Capital, Luminus Management, and Appaloosa Management LP were also bullish on Summit Materials Inc (NYSE:SUM), allocating a large percentage of their portfolios to this stock.

Since Summit Materials Inc (NYSE:SUM) has witnessed falling interest from hedge fund managers, logic holds that there is a sect of hedgies who were dropping their positions entirely last quarter. At the top of the heap, John A. Levin's Levin Capital Strategies sold off the biggest investment of the 700 funds followed by Insider Monkey, valued at about $50.8 million in stock. Robert Pitts's fund, Steadfast Capital Management, also sold off its stock, about $39.3 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 6 funds last quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Summit Materials Inc (NYSE:SUM) but similarly valued. We will take a look at Taylor Morrison Home Corp (NYSE:TMHC), TopBuild Corp (NYSE:BLD), Advanced Energy Industries, Inc. (NASDAQ:AEIS), and Evoqua Water Technologies Corp. (NYSE:AQUA). This group of stocks' market caps resemble SUM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TMHC,21,398861,0 BLD,18,142394,5 AEIS,19,191790,0 AQUA,11,42787,-1 Average,17.25,193958,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $194 million. That figure was $570 million in SUM's case. Taylor Morrison Home Corp (NYSE:TMHC) is the most popular stock in this table. On the other hand Evoqua Water Technologies Corp. (NYSE:AQUA) is the least popular one with only 11 bullish hedge fund positions. Summit Materials Inc (NYSE:SUM) 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. In this regard TMHC might be a better candidate to consider a long position.

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

Related Content