While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Eagle Materials, Inc. (NYSE:EXP) and see how the stock performed in comparison to hedge funds’ consensus picks.
Eagle Materials, Inc. (NYSE:EXP) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 36 hedge funds’ portfolios at the end of the third quarter of 2019. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Ternium S.A. (NYSE:TX), Cyberark Software Ltd (NASDAQ:CYBR), and DCP Midstream LP (NYSE:DCP) to gather more data points. Our calculations also showed that EXP 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).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Scott Ferguson of Sachem Head Capital
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. 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 already gained 20 percent. Now let’s take a glance at the key hedge fund action encompassing Eagle Materials, Inc. (NYSE:EXP).
What have hedge funds been doing with Eagle Materials, Inc. (NYSE:EXP)?
At Q3’s end, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2019. By comparison, 32 hedge funds held shares or bullish call options in EXP 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.
Among these funds, Sachem Head Capital held the most valuable stake in Eagle Materials, Inc. (NYSE:EXP), which was worth $294.3 million at the end of the third quarter. On the second spot was Empyrean Capital Partners which amassed $91.1 million worth of shares. Long Pond Capital, Millennium Management, 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 Sachem Head Capital allocated the biggest weight to Eagle Materials, Inc. (NYSE:EXP), around 23.04% of its 13F portfolio. Broad Bay Capital is also relatively very bullish on the stock, dishing out 10.03 percent of its 13F equity portfolio to EXP.
Because Eagle Materials, Inc. (NYSE:EXP) has witnessed a decline in interest from the smart money, we can see that there was a specific group of funds who sold off their entire stakes last quarter. Interestingly, Lee Ainslie’s Maverick Capital sold off the biggest position of all the hedgies followed by Insider Monkey, worth about $38 million in call options, and Traci Lerner’s Chescapmanager LLC was right behind this move, as the fund sold off about $23.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks similar to Eagle Materials, Inc. (NYSE:EXP). We will take a look at Ternium S.A. (NYSE:TX), Cyberark Software Ltd (NASDAQ:CYBR), DCP Midstream LP (NYSE:DCP), and Cameco Corporation (NYSE:CCJ). This group of stocks’ market valuations match EXP’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TX | 8 | 52465 | -6 |
| CYBR | 18 | 257050 | -1 |
| DCP | 3 | 8420 | 1 |
| CCJ | 25 | 384721 | 1 |
| Average | 13.5 | 175664 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $176 million. That figure was $819 million in EXP’s case. Cameco Corporation (NYSE:CCJ) is the most popular stock in this table. On the other hand DCP Midstream LP (NYSE:DCP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Eagle Materials, Inc. (NYSE:EXP) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on EXP as the stock returned 47.2% so far in 2019 (through 12/23) 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.
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.
