We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Cheniere Energy, Inc. (NYSE:LNG).
Cheniere Energy, Inc. (NYSE:LNG) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 43 hedge funds’ portfolios at the end of the fourth quarter of 2019. At the end of this article we will also compare LNG to other stocks including Arista Networks Inc (NYSE:ANET), SS&C Technologies Holdings, Inc. (NASDAQ:SSNC), and Paycom Software Inc (NYSE:PAYC) to get a better sense of its popularity.
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 41 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.
Carl Icahn of Icahn Capital
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 let’s take a gander at the latest hedge fund action encompassing Cheniere Energy, Inc. (NYSE:LNG).
How are hedge funds trading Cheniere Energy, Inc. (NYSE:LNG)?
Heading into the first quarter of 2020, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards LNG over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Icahn Capital LP held the most valuable stake in Cheniere Energy, Inc. (NYSE:LNG), which was worth $1196.1 million at the end of the third quarter. On the second spot was Baupost Group which amassed $619.2 million worth of shares. Kensico Capital, Steadfast Capital Management, and Zimmer 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 Dumont Global allocated the biggest weight to Cheniere Energy, Inc. (NYSE:LNG), around 46.67% of its 13F portfolio. MFN Partners is also relatively very bullish on the stock, designating 13.21 percent of its 13F equity portfolio to LNG.
Judging by the fact that Cheniere Energy, Inc. (NYSE:LNG) has faced a decline in interest from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of money managers that slashed their positions entirely by the end of the third quarter. At the top of the heap, Kevin Michael Ulrich and Anthony Davis’s Anchorage Advisors dumped the largest position of the 750 funds tracked by Insider Monkey, comprising close to $245.7 million in stock. Bruce Kovner’s fund, Caxton Associates LP, also sold off its stock, about $36.5 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Cheniere Energy, Inc. (NYSE:LNG) but similarly valued. We will take a look at Arista Networks Inc (NYSE:ANET), SS&C Technologies Holdings, Inc. (NASDAQ:SSNC), Paycom Software Inc (NYSE:PAYC), and Genuine Parts Company (NYSE:GPC). All of these stocks’ market caps match LNG’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ANET | 26 | 284265 | 3 |
| SSNC | 59 | 1996210 | 13 |
| PAYC | 27 | 385882 | -6 |
| GPC | 21 | 271270 | 0 |
| Average | 33.25 | 734407 | 2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $734 million. That figure was $3483 million in LNG’s case. SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) is the most popular stock in this table. On the other hand Genuine Parts Company (NYSE:GPC) is the least popular one with only 21 bullish hedge fund positions. Cheniere Energy, Inc. (NYSE:LNG) 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 41.3% 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 beat the market by 3.2 percentage points. Unfortunately LNG wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on LNG were disappointed as the stock returned -42.2% 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 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.
