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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 Texas Pacific Land Trust (NYSE:TPL).
Is TPL a good stock to buy now? Texas Pacific Land Trust (NYSE:TPL) was in 13 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 17. TPL has seen a decrease in activity from the world's largest hedge funds of late. There were 14 hedge funds in our database with TPL holdings at the end of June. Our calculations also showed that TPL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 monthly stock picks returned 113% since March 2017 and outperformed the S&P 500 ETFs by more than 66 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.
Dmitry Balyasny of Balyasny Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. With all of this in mind let's take a gander at the new hedge fund action surrounding Texas Pacific Land Trust (NYSE:TPL).
Do Hedge Funds Think TPL Is A Good Stock To Buy Now?
At the end of September, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in TPL a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
The largest stake in Texas Pacific Land Trust (NYSE:TPL) was held by Horizon Asset Management, which reported holding $742.2 million worth of stock at the end of September. It was followed by Beddow Capital Management with a $4.7 million position. Other investors bullish on the company included GLG Partners, Mountain Lake Investment Management, and Arosa Capital Management. In terms of the portfolio weights assigned to each position Horizon Asset Management allocated the biggest weight to Texas Pacific Land Trust (NYSE:TPL), around 29.79% of its 13F portfolio. Beddow Capital Management is also relatively very bullish on the stock, earmarking 4.06 percent of its 13F equity portfolio to TPL.
Seeing as Texas Pacific Land Trust (NYSE:TPL) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of hedge funds that slashed their entire stakes in the third quarter. Interestingly, Matt Smith's Deep Basin Capital cut the biggest stake of the 750 funds watched by Insider Monkey, comprising an estimated $7.1 million in stock. Brandon Haley's fund, Holocene Advisors, also sold off its stock, about $1.1 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 1 funds in the third quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Texas Pacific Land Trust (NYSE:TPL) but similarly valued. These stocks are The Hain Celestial Group, Inc. (NASDAQ:HAIN), Highwoods Properties Inc (NYSE:HIW), Grupo Televisa SAB (NYSE:TV), Grupo Aeroportuario del Sureste (NYSE:ASR), Spirit Realty Capital Inc (NYSE:SRC), Fate Therapeutics Inc (NASDAQ:FATE), and Endava plc (NYSE:DAVA). This group of stocks' market caps resemble TPL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HAIN,21,892531,-3 HIW,25,262650,-5 TV,17,499490,-4 ASR,10,51222,-1 SRC,16,136469,-2 FATE,34,1045651,-2 DAVA,11,131431,3 Average,19.1,431349,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.1 hedge funds with bullish positions and the average amount invested in these stocks was $431 million. That figure was $762 million in TPL's case. Fate Therapeutics Inc (NASDAQ:FATE) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Sureste (NYSE:ASR) is the least popular one with only 10 bullish hedge fund positions. Texas Pacific Land Trust (NYSE:TPL) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TPL is 33.2. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on TPL as the stock returned 48.8% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.