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Were Hedge Funds Right About Warming Up To Cemex SAB de CV (CX)?

Asma UL Husna

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. With this in mind let's see whether Cemex SAB de CV (NYSE:CX) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

Is Cemex SAB de CV (NYSE:CX) a bargain? The smart money is turning bullish. The number of bullish hedge fund positions went up by 2 lately. Our calculations also showed that CX 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_30614" align="aligncenter" width="399"] Howard Marks of Oaktree Capital Management[/caption]

Howard Marks OAKTREE CAPITAL MANAGEMENT

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. Now we're going to check out the recent hedge fund action surrounding Cemex SAB de CV (NYSE:CX).

How are hedge funds trading Cemex SAB de CV (NYSE:CX)?

At the end of the fourth quarter, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 18% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CX over the last 18 quarters. With the smart money's capital changing hands, there exists a select group of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Oaktree Capital Management, managed by Howard Marks, holds the biggest position in Cemex SAB de CV (NYSE:CX). Oaktree Capital Management has a $32.7 million position in the stock, comprising 0.6% of its 13F portfolio. Sitting at the No. 2 spot is Jeremy Hosking of Hosking Partners, with a $29.3 million position; 0.7% of its 13F portfolio is allocated to the stock. Some other peers that hold long positions encompass Ken Fisher's Fisher Asset Management, Mubadala Investment's MIC Capital Partners and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position MIC Capital Partners allocated the biggest weight to Cemex SAB de CV (NYSE:CX), around 2.67% of its 13F portfolio. Hosking Partners is also relatively very bullish on the stock, earmarking 0.71 percent of its 13F equity portfolio to CX.

As one would reasonably expect, some big names were breaking ground themselves. MIC Capital Partners, managed by Mubadala Investment, established the most valuable position in Cemex SAB de CV (NYSE:CX). MIC Capital Partners had $7.8 million invested in the company at the end of the quarter. David Kowitz and Sheldon Kasowitz's Indus Capital also made a $1.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Ali Motamed's Invenomic Capital Management and Donald Sussman's Paloma Partners.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Cemex SAB de CV (NYSE:CX) but similarly valued. We will take a look at New York Community Bancorp, Inc. (NYSE:NYCB), National Instruments Corporation (NASDAQ:NATI), EPR Properties (NYSE:EPR), and TFS Financial Corporation (NASDAQ:TFSL). This group of stocks' market caps are similar to CX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NYCB,27,214458,0 NATI,30,295238,3 EPR,24,227647,1 TFSL,11,173480,3 Average,23,227706,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $228 million. That figure was $89 million in CX's case. National Instruments Corporation (NASDAQ:NATI) is the most popular stock in this table. On the other hand TFS Financial Corporation (NASDAQ:TFSL) is the least popular one with only 11 bullish hedge fund positions. Cemex SAB de CV (NYSE:CX) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 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 beat the market by 5.5 percentage points. Unfortunately CX wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CX investors were disappointed as the stock returned -54.2% 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 in Q1. 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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