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Were Hedge Funds Right About Dumping ArcelorMittal (MT)?

Reymerlyn Martin

The elite funds run by legendary investors such as David Tepper and Dan Loeb make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don't follow. Because of their pay structures, they have strong incentives to do the research necessary to beat the market. That's why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at ArcelorMittal (NYSE:MT) from the perspective of those elite funds.

ArcelorMittal (NYSE:MT) has seen a decrease in enthusiasm from smart money recently. MT was in 13 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 14 hedge funds in our database with MT holdings at the end of the previous quarter. Our calculations also showed that MT 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 32 percentage points since May 2014 through March 12, 2019 (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.

Dmitry Balyasny

Let's take a gander at the latest hedge fund action encompassing ArcelorMittal (NYSE:MT).

How are hedge funds trading ArcelorMittal (NYSE:MT)?

At the end of the fourth quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in MT over the last 14 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

MT_mar2019

More specifically, Citadel Investment Group was the largest shareholder of ArcelorMittal (NYSE:MT), with a stake worth $78.2 million reported as of the end of September. Trailing Citadel Investment Group was Arrowstreet Capital, which amassed a stake valued at $47.9 million. Balyasny Asset Management, Highline Capital Management, and Renaissance Technologies were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that ArcelorMittal (NYSE:MT) has experienced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedgies that slashed their positions entirely heading into Q3. It's worth mentioning that Alexander Mitchell's Scopus Asset Management said goodbye to the largest investment of all the hedgies tracked by Insider Monkey, worth close to $46.3 million in stock, and David Costen Haley's HBK Investments was right behind this move, as the fund sold off about $5.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds heading into Q3.

Let's go over hedge fund activity in other stocks similar to ArcelorMittal (NYSE:MT). These stocks are Ventas, Inc. (NYSE:VTR), Rogers Communications Inc. (NYSE:RCI), Eversource Energy (NYSE:ES), and Concho Resources Inc. (NYSE:CXO). This group of stocks' market valuations are closest to MT's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VTR,14,284947,-1 RCI,13,518999,-2 ES,20,658373,1 CXO,35,450887,3 Average,20.5,478302,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $478 million. That figure was $210 million in MT's case. Concho Resources Inc. (NYSE:CXO) is the most popular stock in this table. On the other hand Rogers Communications Inc. (NYSE:RCI) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks ArcelorMittal (NYSE:MT) is even less popular than RCI. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately MT wasn't in this group. Hedge funds that bet on MT were disappointed as the stock returned 4.4% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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