U.S. Markets open in 54 mins

Were Hedge Funds Right About Dumping China Petroleum & Chemical Corp (SNP)?

Abigail Fisher

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of China Petroleum & Chemical Corp (NYSE:SNP).

Is China Petroleum & Chemical Corp (NYSE:SNP) a worthy investment today? Money managers are in a bearish mood. The number of long hedge fund positions shrunk by 2 lately. Our calculations also showed that SNP isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

SNP_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to check out the latest hedge fund action encompassing China Petroleum & Chemical Corp (NYSE:SNP).

What does smart money think about China Petroleum & Chemical Corp (NYSE:SNP)?

At the end of the second quarter, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the first quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in SNP 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.

John Overdeck of Two Sigma

Among these funds, Renaissance Technologies held the most valuable stake in China Petroleum & Chemical Corp (NYSE:SNP), which was worth $128.9 million at the end of the second quarter. On the second spot was Arrowstreet Capital which amassed $55.4 million worth of shares. Moreover, Two Sigma Advisors, Millennium Management, and Sensato Capital Management were also bullish on China Petroleum & Chemical Corp (NYSE:SNP), allocating a large percentage of their portfolios to this stock.

Seeing as China Petroleum & Chemical Corp (NYSE:SNP) has witnessed bearish sentiment from the smart money, it's easy to see that there lies a certain "tier" of fund managers who were dropping their positions entirely by the end of the second quarter. Intriguingly, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners cut the largest position of all the hedgies monitored by Insider Monkey, comprising close to $3.7 million in stock, and Minhua Zhang's Weld Capital Management was right behind this move, as the fund sold off about $2.8 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds by the end of the second quarter.

Let's also examine hedge fund activity in other stocks similar to China Petroleum & Chemical Corp (NYSE:SNP). We will take a look at Lowe's Companies, Inc. (NYSE:LOW), Mondelez International Inc (NASDAQ:MDLZ), Banco Bradesco SA (NYSE:BBD), and Caterpillar Inc. (NYSE:CAT). This group of stocks' market values are closest to SNP's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LOW,63,4104051,7 MDLZ,47,2755070,0 BBD,14,751983,-4 CAT,45,3000982,-8 Average,42.25,2653022,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.25 hedge funds with bullish positions and the average amount invested in these stocks was $2653 million. That figure was $222 million in SNP's case. Lowe's Companies, Inc. (NYSE:LOW) is the most popular stock in this table. On the other hand Banco Bradesco SA (NYSE:BBD) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks China Petroleum & Chemical Corp (NYSE:SNP) is even less popular than BBD. Hedge funds dodged a bullet by taking a bearish stance towards SNP. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately SNP wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SNP investors were disappointed as the stock returned -11.5% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.

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

Related Content