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 (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the first quarter. One of these stocks was Carpenter Technology Corporation (NYSE:CRS).
Is Carpenter Technology Corporation (NYSE:CRS) a good investment right now? Money managers are getting more bullish. The number of bullish hedge fund bets improved by 2 lately. Our calculations also showed that CRS isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). CRS was in 16 hedge funds’ portfolios at the end of December. There were 14 hedge funds in our database with CRS positions at the end of the previous quarter.
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 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.
Bruce Kovner of Caxton Associates LP
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we’re going to check out the recent hedge fund action encompassing Carpenter Technology Corporation (NYSE:CRS).
What does smart money think about Carpenter Technology Corporation (NYSE:CRS)?
At the end of the fourth quarter, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CRS over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Huber Capital Management was the largest shareholder of Carpenter Technology Corporation (NYSE:CRS), with a stake worth $19.5 million reported as of the end of September. Trailing Huber Capital Management was Fisher Asset Management, which amassed a stake valued at $16.9 million. Millennium Management, Royce & Associates, and AQR Capital Management 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 Huber Capital Management allocated the biggest weight to Carpenter Technology Corporation (NYSE:CRS), around 2.56% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, dishing out 0.09 percent of its 13F equity portfolio to CRS.
As industrywide interest jumped, key money managers were breaking ground themselves. Caxton Associates LP, managed by Bruce Kovner, established the most valuable position in Carpenter Technology Corporation (NYSE:CRS). Caxton Associates LP had $0.6 million invested in the company at the end of the quarter. Ray Dalio’s Bridgewater Associates also initiated a $0.6 million position during the quarter. The following funds were also among the new CRS investors: Benjamin A. Smith’s Laurion Capital Management, Peter Muller’s PDT Partners, and Karim Abbadi and Edward McBride’s Centiva Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Carpenter Technology Corporation (NYSE:CRS) but similarly valued. We will take a look at Prospect Capital Corporation (NASDAQ:PSEC), ExlService Holdings, Inc. (NASDAQ:EXLS), Varonis Systems Inc (NASDAQ:VRNS), and SSR Mining Inc. (NASDAQ:SSRM). This group of stocks’ market values are closest to CRS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PSEC | 15 | 72643 | 3 |
| EXLS | 18 | 48631 | 2 |
| VRNS | 18 | 455392 | -7 |
| SSRM | 16 | 229804 | 1 |
| Average | 16.75 | 201618 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $202 million. That figure was $74 million in CRS’s case. ExlService Holdings, Inc. (NASDAQ:EXLS) is the most popular stock in this table. On the other hand Prospect Capital Corporation (NASDAQ:PSEC) is the least popular one with only 15 bullish hedge fund positions. Carpenter Technology Corporation (NYSE:CRS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately CRS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CRS investors were disappointed as the stock returned -60.1% 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 most of these stocks already outperformed the market in 2020.
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.
