Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Transportadora de Gas del Sur SA (NYSE:TGS) a good investment right now? The best stock pickers are becoming less hopeful. The number of long hedge fund bets went down by 1 in recent months. Our calculations also showed that TGS 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_30614" align="alignnone" width="600"] Howard Marks of Oaktree Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's check out the recent hedge fund action regarding Transportadora de Gas del Sur SA (NYSE:TGS).
What have hedge funds been doing with Transportadora de Gas del Sur SA (NYSE:TGS)?
Heading into the fourth quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the second quarter of 2019. By comparison, 9 hedge funds held shares or bullish call options in TGS a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Oaktree Capital Management held the most valuable stake in Transportadora de Gas del Sur SA (NYSE:TGS), which was worth $10.3 million at the end of the third quarter. On the second spot was Highland Capital Management which amassed $1.5 million worth of shares. Renaissance Technologies, Arrowstreet Capital, and Citadel 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 Oaktree Capital Management allocated the biggest weight to Transportadora de Gas del Sur SA (NYSE:TGS), around 0.2% of its 13F portfolio. Highland Capital Management is also relatively very bullish on the stock, setting aside 0.1 percent of its 13F equity portfolio to TGS.
Because Transportadora de Gas del Sur SA (NYSE:TGS) has experienced a decline in interest from the aggregate hedge fund industry, it's safe to say that there was a specific group of money managers who sold off their positions entirely heading into Q4. It's worth mentioning that Parvinder Thiara's Athanor Capital cut the largest stake of the 750 funds watched by Insider Monkey, comprising an estimated $1.3 million in stock. Minhua Zhang's fund, Weld Capital Management, also said goodbye to its stock, about $0.3 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 1 funds heading into Q4.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Transportadora de Gas del Sur SA (NYSE:TGS) but similarly valued. These stocks are Regenxbio Inc (NASDAQ:RGNX), First Commonwealth Financial (NYSE:FCF), Scholastic Corp (NASDAQ:SCHL), and Cooper Tire & Rubber Company (NYSE:CTB). This group of stocks' market caps resemble TGS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RGNX,10,171969,-4 FCF,11,30734,-1 SCHL,16,78029,2 CTB,18,135042,3 Average,13.75,103944,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $104 million. That figure was $15 million in TGS's case. Cooper Tire & Rubber Company (NYSE:CTB) is the most popular stock in this table. On the other hand Regenxbio Inc (NASDAQ:RGNX) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Transportadora de Gas del Sur SA (NYSE:TGS) is even less popular than RGNX. Hedge funds dodged a bullet by taking a bearish stance towards TGS. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TGS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); TGS investors were disappointed as the stock returned -29% 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.