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 (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards James Hardie Industries plc (NYSE:JHX).
Hedge fund interest in James Hardie Industries plc (NYSE:JHX) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare JHX to other stocks including Athene Holding Ltd. (NYSE:ATH), Graco Inc. (NYSE:GGG), and Under Armour Inc (NYSE:UA) to get a better sense of its popularity.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Ken Griffin of Citadel Investment Group
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. With all of this in mind we’re going to analyze the recent hedge fund action surrounding James Hardie Industries plc (NYSE:JHX).
What have hedge funds been doing with James Hardie Industries plc (NYSE:JHX)?
At the end of the fourth quarter, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in JHX over the last 18 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of James Hardie Industries plc (NYSE:JHX), with a stake worth $7.1 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $1.7 million. Citadel Investment Group was 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 Renaissance Technologies allocated the biggest weight to James Hardie Industries plc (NYSE:JHX), around 0.01% of its 13F portfolio. D E Shaw is also relatively very bullish on the stock, earmarking 0.002 percent of its 13F equity portfolio to JHX.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Quantamental Technologies. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Citadel Investment Group).
Let’s also examine hedge fund activity in other stocks similar to James Hardie Industries plc (NYSE:JHX). These stocks are Athene Holding Ltd. (NYSE:ATH), Graco Inc. (NYSE:GGG), Under Armour Inc (NYSE:UA), and RenaissanceRe Holdings Ltd. (NYSE:RNR). All of these stocks’ market caps match JHX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ATH | 35 | 1368504 | -8 |
| GGG | 21 | 234617 | -1 |
| UA | 32 | 1014322 | -2 |
| RNR | 23 | 765361 | 5 |
| Average | 27.75 | 845701 | -1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $846 million. That figure was $10 million in JHX’s case. Athene Holding Ltd. (NYSE:ATH) is the most popular stock in this table. On the other hand Graco Inc. (NYSE:GGG) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks James Hardie Industries plc (NYSE:JHX) is even less popular than GGG. Hedge funds dodged a bullet by taking a bearish stance towards JHX. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. Unfortunately JHX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); JHX investors were disappointed as the stock returned -36% 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 so far in Q1.
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.
