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 Diamondback Energy Inc (NASDAQ:FANG).
Is Diamondback Energy Inc (NASDAQ:FANG) undervalued? Hedge funds were buying. The number of bullish hedge fund bets increased by 1 in recent months. Diamondback Energy Inc (NASDAQ:FANG) was in 35 hedge funds’ portfolios at the end of March. The all time high for this statistic is 47. Our calculations also showed that FANG isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 34 hedge funds in our database with FANG holdings at the end of December.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 115 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.
Bill Miller of Miller Value Partners
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now we’re going to take a gander at the key hedge fund action regarding Diamondback Energy Inc (NASDAQ:FANG).
Do Hedge Funds Think FANG Is A Good Stock To Buy Now?
At first quarter’s end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from one quarter earlier. By comparison, 31 hedge funds held shares or bullish call options in FANG a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
More specifically, Miller Value Partners was the largest shareholder of Diamondback Energy Inc (NASDAQ:FANG), with a stake worth $100.5 million reported as of the end of March. Trailing Miller Value Partners was Arrowstreet Capital, which amassed a stake valued at $63.5 million. Citadel Investment Group, Holocene Advisors, 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 Miller Value Partners allocated the biggest weight to Diamondback Energy Inc (NASDAQ:FANG), around 2.6% of its 13F portfolio. Hill City Capital is also relatively very bullish on the stock, designating 2.24 percent of its 13F equity portfolio to FANG.
As one would reasonably expect, specific money managers have jumped into Diamondback Energy Inc (NASDAQ:FANG) headfirst. GLG Partners, managed by Noam Gottesman, assembled the most outsized position in Diamondback Energy Inc (NASDAQ:FANG). GLG Partners had $8.4 million invested in the company at the end of the quarter. Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors also made a $4.5 million investment in the stock during the quarter. The other funds with brand new FANG positions are Israel Englander’s Millennium Management, John Overdeck and David Siegel’s Two Sigma Advisors, and Charles Davidson and Joseph Jacobs’s Wexford Capital.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Diamondback Energy Inc (NASDAQ:FANG) but similarly valued. We will take a look at GameStop Corp. (NYSE:GME), Fortune Brands Home & Security Inc (NYSE:FBHS), PPD, Inc. (NASDAQ:PPD), Hasbro, Inc. (NASDAQ:HAS), Godaddy Inc (NYSE:GDDY), Korea Electric Power Corporation (NYSE:KEP), and iQIYI, Inc. (NASDAQ:IQ). This group of stocks’ market values resemble FANG’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GME | 13 | 96439 | -14 |
| FBHS | 23 | 434532 | -7 |
| PPD | 29 | 822954 | 0 |
| HAS | 31 | 277091 | -5 |
| GDDY | 39 | 2366731 | -5 |
| KEP | 4 | 19253 | -3 |
| IQ | 40 | 1361640 | 10 |
| Average | 25.6 | 768377 | -3.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.6 hedge funds with bullish positions and the average amount invested in these stocks was $768 million. That figure was $344 million in FANG’s case. iQIYI, Inc. (NASDAQ:IQ) is the most popular stock in this table. On the other hand Korea Electric Power Corporation (NYSE:KEP) is the least popular one with only 4 bullish hedge fund positions. Diamondback Energy Inc (NASDAQ:FANG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FANG is 71.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 19.3% in 2021 through June 25th and still beat the market by 4.8 percentage points. Hedge funds were also right about betting on FANG as the stock returned 31.7% since the end of Q1 (through 6/25) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Follow Diamondback Energy Inc. (NASDAQ:FANG)
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Disclosure: None. This article was originally published at Insider Monkey.
