Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Occidental Petroleum Corporation (NYSE:OXY).
Is Occidental Petroleum Corporation (NYSE:OXY) a buy right now? Prominent investors are getting more optimistic. The number of long hedge fund positions rose by 15 recently. Our calculations also showed that OXY 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.
Carl Icahn of Icahn Capital
We leave no stone unturned when looking for the next great investment idea. For example 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. 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. Now we’re going to take a glance at the fresh hedge fund action regarding Occidental Petroleum Corporation (NYSE:OXY).
What have hedge funds been doing with Occidental Petroleum Corporation (NYSE:OXY)?
At Q3’s end, a total of 57 of the hedge funds tracked by Insider Monkey were long this stock, a change of 36% from the previous quarter. By comparison, 35 hedge funds held shares or bullish call options in OXY a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Occidental Petroleum Corporation (NYSE:OXY) was held by Icahn Capital, which reported holding $1171 million worth of stock at the end of September. It was followed by Berkshire Hathaway with a $332.1 million position. Other investors bullish on the company included Two Sigma Advisors, Levin Easterly Partners, and Mason Capital Management. In terms of the portfolio weights assigned to each position Mason Capital Management allocated the biggest weight to Occidental Petroleum Corporation (NYSE:OXY), around 32.17% of its 13F portfolio. One Fin Capital Management is also relatively very bullish on the stock, designating 4.65 percent of its 13F equity portfolio to OXY.
As industrywide interest jumped, specific money managers have been driving this bullishness. Berkshire Hathaway, managed by Warren Buffett, initiated the biggest position in Occidental Petroleum Corporation (NYSE:OXY). Berkshire Hathaway had $332.1 million invested in the company at the end of the quarter. Matt Smith’s Deep Basin Capital also made a $83.8 million investment in the stock during the quarter. The other funds with brand new OXY positions are Paul Marshall and Ian Wace’s Marshall Wace, Michael A. Price and Amos Meron’s Empyrean Capital Partners, and Till Bechtolsheimer’s Arosa Capital Management.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Occidental Petroleum Corporation (NYSE:OXY) but similarly valued. These stocks are Ross Stores, Inc. (NASDAQ:ROST), Constellation Brands, Inc. (NYSE:STZ), Telefonica S.A. (NYSE:TEF), and ICICI Bank Limited (NYSE:IBN). This group of stocks’ market caps are similar to OXY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ROST | 39 | 1067484 | 7 |
| STZ | 41 | 1671280 | 3 |
| TEF | 5 | 34830 | -2 |
| IBN | 26 | 849426 | -3 |
| Average | 27.75 | 905755 | 1.25 |
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 $906 million. That figure was $2774 million in OXY’s case. Constellation Brands, Inc. (NYSE:STZ) is the most popular stock in this table. On the other hand Telefonica S.A. (NYSE:TEF) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Occidental Petroleum Corporation (NYSE:OXY) 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. Unfortunately OXY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on OXY were disappointed as the stock returned -30.9% so far in 2019 (through 12/23) 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 65 percent of these stocks already outperformed the market in 2019.
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.
