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Were Hedge Funds Right About Deserting Schlumberger Limited. (SLB)?

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  • SLB

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 Schlumberger Limited. (NYSE:SLB).

Schlumberger Limited. (NYSE:SLB) was in 41 hedge funds' portfolios at the end of June. The all time high for this statistic is 61. SLB has seen a decrease in support from the world's most elite money managers of late. There were 50 hedge funds in our database with SLB holdings at the end of March. Our calculations also showed that SLB isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 185.4% since March 2017 and outperformed the S&P 500 ETFs by more than 79 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

William Gray Orbis Investment Management
William Gray Orbis Investment Management

William Gray of Orbis Investment 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. Keeping this in mind we're going to take a look at the key hedge fund action surrounding Schlumberger Limited. (NYSE:SLB).

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

At second quarter's end, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the first quarter of 2020. By comparison, 53 hedge funds held shares or bullish call options in SLB a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Among these funds, Fisher Asset Management held the most valuable stake in Schlumberger Limited. (NYSE:SLB), which was worth $496.7 million at the end of the second quarter. On the second spot was D E Shaw which amassed $156.3 million worth of shares. Citadel Investment Group, Orbis Investment Management, and Masters 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 Chiron Investment Management allocated the biggest weight to Schlumberger Limited. (NYSE:SLB), around 3.94% of its 13F portfolio. Lodge Hill Capital is also relatively very bullish on the stock, setting aside 3.67 percent of its 13F equity portfolio to SLB.

Seeing as Schlumberger Limited. (NYSE:SLB) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there exists a select few money managers that decided to sell off their positions entirely by the end of the second quarter. At the top of the heap, Mike Masters's Masters Capital Management cut the biggest stake of all the hedgies followed by Insider Monkey, comprising close to $27.2 million in stock, and Till Bechtolsheimer's Arosa Capital Management was right behind this move, as the fund dropped about $10.8 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 9 funds by the end of the second quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Schlumberger Limited. (NYSE:SLB) but similarly valued. These stocks are TE Connectivity Ltd. (NYSE:TEL), BCE Inc. (NYSE:BCE), Match Group, Inc. (NASDAQ:MTCH), Marriott International Inc (NASDAQ:MAR), L3Harris Technologies, Inc. (NYSE:LHX), Ross Stores, Inc. (NASDAQ:ROST), and Trane Technologies plc (NYSE:TT). All of these stocks' market caps resemble SLB's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TEL,39,2134995,0 BCE,14,113288,4 MTCH,63,3368893,-5 MAR,49,2454304,-9 LHX,42,1016540,1 ROST,51,1448653,3 TT,37,1250491,2 Average,42.1,1683881,-0.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.1 hedge funds with bullish positions and the average amount invested in these stocks was $1684 million. That figure was $1067 million in SLB's case. Match Group, Inc. (NASDAQ:MTCH) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 14 bullish hedge fund positions. Schlumberger Limited. (NYSE:SLB) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SLB is 43.7. 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. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 surpassed the market again by 3.1 percentage points. Unfortunately SLB wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); SLB investors were disappointed as the stock returned 5.2% since the end of June (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 in 2021.

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