It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% in 2019. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Valvoline Inc. (NYSE:VVV).
Valvoline Inc. (NYSE:VVV) shareholders have witnessed an increase in hedge fund interest recently. VVV was in 26 hedge funds’ portfolios at the end of the third quarter of 2019. There were 22 hedge funds in our database with VVV holdings at the end of the previous quarter. Our calculations also showed that VVV isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 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 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.
Louis Bacon Moore of Moore Capital
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let’s view the recent hedge fund action surrounding Valvoline Inc. (NYSE:VVV).
How have hedgies been trading Valvoline Inc. (NYSE:VVV)?
Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 18% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in VVV 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.
More specifically, Tensile Capital was the largest shareholder of Valvoline Inc. (NYSE:VVV), with a stake worth $70.1 million reported as of the end of September. Trailing Tensile Capital was Renaissance Technologies, which amassed a stake valued at $56.6 million. D E Shaw, GAMCO Investors, and Citadel Investment Group 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 Tensile Capital allocated the biggest weight to Valvoline Inc. (NYSE:VVV), around 8.91% of its 13F portfolio. Freshford Capital Management is also relatively very bullish on the stock, dishing out 4.73 percent of its 13F equity portfolio to VVV.
As industrywide interest jumped, some big names have been driving this bullishness. Millennium Management, managed by Israel Englander, initiated the most outsized position in Valvoline Inc. (NYSE:VVV). Millennium Management had $17.4 million invested in the company at the end of the quarter. Louis Bacon’s Moore Global Investments also initiated a $3.3 million position during the quarter. The following funds were also among the new VVV investors: Matthew Tewksbury’s Stevens Capital Management, Steve Cohen’s Point72 Asset Management, and Bruce Kovner’s Caxton Associates.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Valvoline Inc. (NYSE:VVV) but similarly valued. We will take a look at EnLink Midstream LLC (NYSE:ENLC), RBC Bearings Incorporated (NASDAQ:ROLL), Sterling Bancorp (NYSE:STL), and Lumentum Holdings Inc (NASDAQ:LITE). This group of stocks’ market values are similar to VVV’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ENLC | 12 | 38220 | 0 |
| ROLL | 7 | 61593 | 1 |
| STL | 23 | 407369 | 2 |
| LITE | 29 | 219330 | -1 |
| Average | 17.75 | 181628 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $182 million. That figure was $333 million in VVV’s case. Lumentum Holdings Inc (NASDAQ:LITE) is the most popular stock in this table. On the other hand RBC Bearings Incorporated (NASDAQ:ROLL) is the least popular one with only 7 bullish hedge fund positions. Valvoline Inc. (NYSE:VVV) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately VVV wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on VVV were disappointed as the stock returned 13% in 2019 and trailed 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.
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.
