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Were Hedge Funds Right About Tenneco Inc (TEN)?

Abigail Fisher

Hedge funds don't get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don't realize is that 100% of the passive funds didn't see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. 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 see whether Tenneco Inc (NYSE:TEN) represents a good buying opportunity at the moment.

Is Tenneco Inc (NYSE:TEN) a healthy stock for your portfolio? Hedge funds are in a bullish mood. The number of bullish hedge fund bets advanced by 8 in recent months. Our calculations also showed that TEN 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).

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 S&P 500 ETFs by more than 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. 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_25910" align="aligncenter" width="399"] Carl Icahn of Icahn Capital[/caption]

Most Popular Stocks Among Hedge Funds

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with high accuracy, so we check out his stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 we're going to review the key hedge fund action encompassing Tenneco Inc (NYSE:TEN).

How are hedge funds trading Tenneco Inc (NYSE:TEN)?

At Q4's end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 62% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in TEN a year ago. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Carl Icahn's Icahn Capital LP has the number one position in Tenneco Inc (NYSE:TEN), worth close to $74 million, accounting for 0.3% of its total 13F portfolio. The second largest stake is held by Andrew Wellington and Jeff Keswin of Lyrical Asset Management, with a $34.6 million position; 0.5% of its 13F portfolio is allocated to the stock. Other professional money managers with similar optimism consist of Mario Gabelli's GAMCO Investors, Jeremy Carton and Gilbert Li's Alta Fundamental Advisers and Renaissance Technologies. In terms of the portfolio weights assigned to each position Alta Fundamental Advisers allocated the biggest weight to Tenneco Inc (NYSE:TEN), around 4.96% of its 13F portfolio. Lyrical Asset Management is also relatively very bullish on the stock, setting aside 0.47 percent of its 13F equity portfolio to TEN.

Consequently, key hedge funds were leading the bulls' herd. Alta Fundamental Advisers, managed by Jeremy Carton and Gilbert Li, created the largest position in Tenneco Inc (NYSE:TEN). Alta Fundamental Advisers had $5.4 million invested in the company at the end of the quarter. Ali Motamed's Invenomic Capital Management also initiated a $0.9 million position during the quarter. The other funds with new positions in the stock are Peter Algert and Kevin Coldiron's Algert Coldiron Investors, Steve Cohen's Point72 Asset Management, and Michael Gelband's ExodusPoint Capital.

Let's also examine hedge fund activity in other stocks similar to Tenneco Inc (NYSE:TEN). We will take a look at National Western Life Group, Inc. (NASDAQ:NWLI), Nova Measuring Instruments Ltd. (NASDAQ:NVMI), Photronics, Inc. (NASDAQ:PLAB), and The Greenbrier Companies Inc (NYSE:GBX). This group of stocks' market values are closest to TEN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NWLI,6,15097,-3 NVMI,10,203261,0 PLAB,21,113599,3 GBX,12,24436,2 Average,12.25,89098,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $89 million. That figure was $143 million in TEN's case. Photronics, Inc. (NASDAQ:PLAB) is the most popular stock in this table. On the other hand National Western Life Group, Inc. (NASDAQ:NWLI) is the least popular one with only 6 bullish hedge fund positions. Tenneco Inc (NYSE:TEN) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately TEN wasn't nearly as popular as these 10 stocks and hedge funds that were betting on TEN were disappointed as the stock returned -62.6% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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