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 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% 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 Eastman Chemical Company (NYSE:EMN).
Eastman Chemical Company (NYSE:EMN) was in 27 hedge funds’ portfolios at the end of the third quarter of 2019. EMN has seen an increase in hedge fund sentiment lately. There were 23 hedge funds in our database with EMN holdings at the end of the previous quarter. Our calculations also showed that EMN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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.
Alexander Roepers of Atlantic Investment Management
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to go over the fresh hedge fund action regarding Eastman Chemical Company (NYSE:EMN).
What does smart money think about Eastman Chemical Company (NYSE:EMN)?
At Q3’s end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the previous quarter. On the other hand, there were a total of 25 hedge funds with a bullish position in EMN 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.
According to Insider Monkey’s hedge fund database, Diamond Hill Capital, managed by Ric Dillon, holds the number one position in Eastman Chemical Company (NYSE:EMN). Diamond Hill Capital has a $101.2 million position in the stock, comprising 0.5% of its 13F portfolio. The second largest stake is held by Cliff Asness of AQR Capital Management, with a $83.1 million position; 0.1% of its 13F portfolio is allocated to the company. Other members of the smart money that are bullish encompass David E. Shaw’s D E Shaw, Thomas E. Claugus’s GMT Capital and Alexander Roepers’s Atlantic Investment Management. In terms of the portfolio weights assigned to each position Atlantic Investment Management allocated the biggest weight to Eastman Chemical Company (NYSE:EMN), around 13.03% of its portfolio. GMT Capital is also relatively very bullish on the stock, designating 1.4 percent of its 13F equity portfolio to EMN.
With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Scopus Asset Management, managed by Alexander Mitchell, initiated the most outsized position in Eastman Chemical Company (NYSE:EMN). Scopus Asset Management had $5.5 million invested in the company at the end of the quarter. David E. Shaw’s D E Shaw also initiated a $4.4 million position during the quarter. The other funds with new positions in the stock are Sara Nainzadeh’s Centenus Global Management, Matthew Hulsizer’s PEAK6 Capital Management, and Michael Gelband’s ExodusPoint Capital.
Let’s now review hedge fund activity in other stocks similar to Eastman Chemical Company (NYSE:EMN). These stocks are Domino’s Pizza, Inc. (NYSE:DPZ), Weibo Corp (NASDAQ:WB), Whirlpool Corporation (NYSE:WHR), and Packaging Corporation Of America (NYSE:PKG). This group of stocks’ market values match EMN’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DPZ | 36 | 1932455 | 9 |
| WB | 14 | 353314 | -2 |
| WHR | 28 | 978810 | 9 |
| PKG | 16 | 119433 | -5 |
| Average | 23.5 | 846003 | 2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $846 million. That figure was $409 million in EMN’s case. Domino’s Pizza, Inc. (NYSE:DPZ) is the most popular stock in this table. On the other hand Weibo Corp (NASDAQ:WB) is the least popular one with only 14 bullish hedge fund positions. Eastman Chemical Company (NYSE:EMN) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on EMN, though not to the same extent, as the stock returned 6.1% during the first two months of the fourth quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
