Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors’ favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds’ top consensus picks. This year hedge funds’ top 20 stock picks outperformed the S&P 500 Index by 9.9 percentage points through the end of November. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
Kosmos Energy Ltd (NYSE:KOS) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 24 hedge funds’ portfolios at the end of September. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Golub Capital BDC Inc (NASDAQ:GBDC), Triton International Limited (NYSE:TRTN), and Taubman Centers, Inc. (NYSE:TCO) to gather more data points. Our calculations also showed that KOS 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.
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 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.
Cliff Asness of AQR Capital 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. Let’s take a gander at the key hedge fund action encompassing Kosmos Energy Ltd (NYSE:KOS).
Hedge fund activity in Kosmos Energy Ltd (NYSE:KOS)
At the end of the third quarter, a total of 24 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 KOS over the last 17 quarters. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, Point72 Asset Management was the largest shareholder of Kosmos Energy Ltd (NYSE:KOS), with a stake worth $29.1 million reported as of the end of September. Trailing Point72 Asset Management was Millennium Management, which amassed a stake valued at $27.3 million. Deep Basin Capital, AQR Capital Management, 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 GeoSphere Capital Management allocated the biggest weight to Kosmos Energy Ltd (NYSE:KOS), around 6.57% of its portfolio. Elm Ridge Capital is also relatively very bullish on the stock, setting aside 4.63 percent of its 13F equity portfolio to KOS.
Seeing as Kosmos Energy Ltd (NYSE:KOS) has faced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there is a sect of funds that slashed their full holdings by the end of the third quarter. At the top of the heap, Stuart J. Zimmer’s Zimmer Partners said goodbye to the largest position of the 750 funds monitored by Insider Monkey, worth an estimated $28.2 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dropped about $14.5 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 check out hedge fund activity in other stocks – not necessarily in the same industry as Kosmos Energy Ltd (NYSE:KOS) but similarly valued. These stocks are Golub Capital BDC Inc (NASDAQ:GBDC), Triton International Limited (NYSE:TRTN), Taubman Centers, Inc. (NYSE:TCO), and John Wiley & Sons Inc (NYSE:JW). This group of stocks’ market values are closest to KOS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GBDC | 11 | 47351 | 3 |
| TRTN | 14 | 50512 | 0 |
| TCO | 21 | 136881 | -4 |
| JW | 18 | 103460 | 1 |
| Average | 16 | 84551 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $85 million. That figure was $154 million in KOS’s case. Taubman Centers, Inc. (NYSE:TCO) is the most popular stock in this table. On the other hand Golub Capital BDC Inc (NASDAQ:GBDC) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Kosmos Energy Ltd (NYSE:KOS) is more popular among hedge funds. 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. Unfortunately KOS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KOS were disappointed as the stock returned -3.6% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
