Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57%. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 41.1% in 2019 (through December 23rd) and outperformed the broader market benchmark by 10.1 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is CF Industries Holdings, Inc. (NYSE:CF) undervalued? Prominent investors are taking a bullish view. The number of long hedge fund bets increased by 4 lately. Our calculations also showed that CF 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). CF was in 39 hedge funds’ portfolios at the end of September. There were 35 hedge funds in our database with CF positions at the end of the previous quarter.
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.
Ricky Sandler of Eminence 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. With all of this in mind we’re going to analyze the recent hedge fund action regarding CF Industries Holdings, Inc. (NYSE:CF).
What does smart money think about CF Industries Holdings, Inc. (NYSE:CF)?
At the end of the third quarter, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CF over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Eminence Capital held the most valuable stake in CF Industries Holdings, Inc. (NYSE:CF), which was worth $191.8 million at the end of the third quarter. On the second spot was Glendon Capital Management which amassed $144.2 million worth of shares. Platinum Asset Management, Two Sigma Advisors, and Thunderbird Partners 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 Glendon Capital Management allocated the biggest weight to CF Industries Holdings, Inc. (NYSE:CF), around 33.27% of its 13F portfolio. Horseman Capital Management is also relatively very bullish on the stock, setting aside 8.02 percent of its 13F equity portfolio to CF.
As aggregate interest increased, some big names have been driving this bullishness. Renaissance Technologies, initiated the largest position in CF Industries Holdings, Inc. (NYSE:CF). Renaissance Technologies had $28.8 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also made a $20.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Ray Dalio’s Bridgewater Associates, Javier Velazquez’s Albar Capital, and Matthew Tewksbury’s Stevens Capital Management.
Let’s go over hedge fund activity in other stocks similar to CF Industries Holdings, Inc. (NYSE:CF). We will take a look at Sasol Limited (NYSE:SSL), Lamb Weston Holdings, Inc. (NYSE:LW), UGI Corp (NYSE:UGI), and E*TRADE Financial Corporation (NASDAQ:ETFC). All of these stocks’ market caps match CF’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SSL | 8 | 26026 | 0 |
| LW | 33 | 438896 | 4 |
| UGI | 19 | 317167 | -1 |
| ETFC | 39 | 875017 | -4 |
| Average | 24.75 | 414277 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $414 million. That figure was $956 million in CF’s case. E*TRADE Financial Corporation (NASDAQ:ETFC) is the most popular stock in this table. On the other hand Sasol Limited (NYSE:SSL) is the least popular one with only 8 bullish hedge fund positions. CF Industries Holdings, Inc. (NYSE:CF) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CF wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CF were disappointed as the stock returned 12.8% in 2019 (through December 23rd) 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 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.
