Did Hedge Funds Make The Right Call On Owens Corning (OC) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards Owens Corning (NYSE:OC) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Owens Corning (NYSE:OC) a marvelous investment now? The best stock pickers were in a bearish mood. The number of bullish hedge fund positions retreated by 17 in recent months. Our calculations also showed that OC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). OC was in 30 hedge funds’ portfolios at the end of March. There were 47 hedge funds in our database with OC holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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.

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to check out the new hedge fund action encompassing Owens Corning (NYSE:OC).

How are hedge funds trading Owens Corning (NYSE:OC)?

At the end of the first quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -36% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in OC over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the largest position in Owens Corning (NYSE:OC). Citadel Investment Group has a $137 million position in the stock, comprising 0.1% of its 13F portfolio. The second most bullish fund manager is Cliff Asness of AQR Capital Management, with a $70.3 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors that are bullish comprise Phill Gross and Robert Atchinson’s Adage Capital Management, Principal Global Investors’s Columbus Circle Investors and Thomas E. Claugus’s GMT Capital. In terms of the portfolio weights assigned to each position Lodge Hill Capital allocated the biggest weight to Owens Corning (NYSE:OC), around 5.18% of its 13F portfolio. Columbus Circle Investors is also relatively very bullish on the stock, dishing out 1.39 percent of its 13F equity portfolio to OC.

Since Owens Corning (NYSE:OC) has experienced falling interest from hedge fund managers, logic holds that there is a sect of fund managers who were dropping their positions entirely heading into Q4. At the top of the heap, John Khoury’s Long Pond Capital said goodbye to the biggest stake of the “upper crust” of funds tracked by Insider Monkey, comprising about $210.6 million in stock, and Josh Donfeld and David Rogers’s Castle Hook Partners was right behind this move, as the fund dumped about $57.6 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 17 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Owens Corning (NYSE:OC) but similarly valued. These stocks are Kimco Realty Corp (NYSE:KIM), Arrow Electronics, Inc. (NYSE:ARW), Invesco Ltd. (NYSE:IVZ), and ICU Medical, Inc. (NASDAQ:ICUI). This group of stocks’ market valuations are closest to OC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $226 million. That figure was $399 million in OC’s case. Invesco Ltd. (NYSE:IVZ) is the most popular stock in this table. On the other hand Kimco Realty Corp (NYSE:KIM) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Owens Corning (NYSE:OC) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on OC as the stock returned 43.7% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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