Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's analyze whether Cullen/Frost Bankers, Inc. (NYSE:CFR) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.
Cullen/Frost Bankers, Inc. (NYSE:CFR) shareholders have witnessed a decrease in hedge fund sentiment lately. CFR was in 18 hedge funds' portfolios at the end of December. There were 22 hedge funds in our database with CFR positions at the end of the previous quarter. Our calculations also showed that CFR isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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' 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 S&P 500 ETFs by 41 percentage points since March 2017 (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.
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David Harding of Winton Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind let's analyze the new hedge fund action surrounding Cullen/Frost Bankers, Inc. (NYSE:CFR).
What does smart money think about Cullen/Frost Bankers, Inc. (NYSE:CFR)?
At the end of the fourth quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CFR over the last 18 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Carson Yost's Yost Capital Management has the most valuable position in Cullen/Frost Bankers, Inc. (NYSE:CFR), worth close to $17.4 million, corresponding to 13.7% of its total 13F portfolio. Coming in second is Ken Griffin of Citadel Investment Group, with a $12.8 million call position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other professional money managers that are bullish contain Cliff Asness's AQR Capital Management, John Overdeck and David Siegel's Two Sigma Advisors and David Harding's Winton Capital Management. In terms of the portfolio weights assigned to each position Yost Capital Management allocated the biggest weight to Cullen/Frost Bankers, Inc. (NYSE:CFR), around 13.66% of its 13F portfolio. Swift Run Capital Management is also relatively very bullish on the stock, setting aside 1.57 percent of its 13F equity portfolio to CFR.
Because Cullen/Frost Bankers, Inc. (NYSE:CFR) has experienced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there exists a select few fund managers who were dropping their full holdings by the end of the third quarter. It's worth mentioning that Israel Englander's Millennium Management dropped the biggest position of the 750 funds tracked by Insider Monkey, valued at close to $32.5 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also dropped its stock, about $6.7 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 4 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Cullen/Frost Bankers, Inc. (NYSE:CFR) but similarly valued. These stocks are Knight Transportation Inc. (NYSE:KNX), CubeSmart (NYSE:CUBE), EnCana Corporation (NYSE:ECA), and Bilibili Inc. (NASDAQ:BILI). This group of stocks' market values resemble CFR's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KNX,26,342433,3 CUBE,27,270281,0 ECA,23,157151,-3 BILI,23,498114,5 Average,24.75,316995,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $317 million. That figure was $59 million in CFR's case. CubeSmart (NYSE:CUBE) is the most popular stock in this table. On the other hand EnCana Corporation (NYSE:ECA) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks Cullen/Frost Bankers, Inc. (NYSE:CFR) is even less popular than ECA. Hedge funds dodged a bullet by taking a bearish stance towards CFR. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but managed to beat the market by 5.5 percentage points. Unfortunately CFR wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CFR investors were disappointed as the stock returned -44% during the same time period 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 most of these stocks already outperformed the market so far in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.AA