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Were Hedge Funds Right About Souring On Diamondback Energy Inc (FANG)?

Nina Todic

Last year's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 34.7% in 2019 (through November 22nd) and outperformed the S&P 500 ETF by 8.5 percentage points. We are done processing the latest 13f filings and in this article we will study how hedge fund sentiment towards Diamondback Energy Inc (NASDAQ:FANG) changed during the first quarter.

Diamondback Energy Inc (NASDAQ:FANG) has experienced a decrease in hedge fund interest in recent months. FANG was in 40 hedge funds' portfolios at the end of the third quarter of 2019. There were 47 hedge funds in our database with FANG holdings at the end of the previous quarter. Our calculations also showed that FANG 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 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 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 stocks that are in our short portfolio.

[caption id="attachment_260193" align="aligncenter" width="450"] Keith Meister of Corvex Capital[/caption]

Keith Meister of Corvex Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's view the fresh hedge fund action regarding Diamondback Energy Inc (NASDAQ:FANG).

What have hedge funds been doing with Diamondback Energy Inc (NASDAQ:FANG)?

Heading into the fourth quarter of 2019, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the second quarter of 2019. By comparison, 37 hedge funds held shares or bullish call options in FANG a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with FANG Positions

Among these funds, Corvex Capital held the most valuable stake in Diamondback Energy Inc (NASDAQ:FANG), which was worth $263.9 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $216.4 million worth of shares. Millennium Management, Point72 Asset Management, and Balyasny Asset 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 Corvex Capital allocated the biggest weight to Diamondback Energy Inc (NASDAQ:FANG), around 13.08% of its portfolio. Bronson Point Partners is also relatively very bullish on the stock, setting aside 7.5 percent of its 13F equity portfolio to FANG.

Judging by the fact that Diamondback Energy Inc (NASDAQ:FANG) has witnessed declining sentiment from hedge fund managers, we can see that there exists a select few funds that slashed their entire stakes last quarter. Interestingly, Perella Weinberg Partners dropped the largest stake of the 750 funds watched by Insider Monkey, comprising about $44.8 million in stock, and Matt Smith's Deep Basin Capital was right behind this move, as the fund cut about $28 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 7 funds last quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Diamondback Energy Inc (NASDAQ:FANG) but similarly valued. We will take a look at NortonLifeLock Inc. (NASDAQ:SYMC), CarMax Inc (NYSE:KMX), Brookfield Infrastructure Partners L.P. (NYSE:BIP), and Genuine Parts Company (NYSE:GPC). This group of stocks' market valuations match FANG's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SYMC,38,1527336,3 KMX,41,1886723,2 BIP,7,54208,0 GPC,20,186065,0 Average,26.5,913583,1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $914 million. That figure was $1201 million in FANG's case. CarMax Inc (NYSE:KMX) is the most popular stock in this table. On the other hand Brookfield Infrastructure Partners L.P. (NYSE:BIP) is the least popular one with only 7 bullish hedge fund positions. Diamondback Energy Inc (NASDAQ:FANG) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately FANG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FANG were disappointed as the stock returned -16% during the fourth quarter (through 11/22) 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 this year.

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

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