Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Reliance Steel & Aluminum Co. (NYSE:RS).
Is Reliance Steel & Aluminum Co. (NYSE:RS) undervalued? The best stock pickers are betting on the stock. The number of long hedge fund positions inched up by 10 recently. Our calculations also showed that RS 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). RS was in 34 hedge funds’ portfolios at the end of December. There were 24 hedge funds in our database with RS positions at the end of the previous quarter.
If you’d ask most stock holders, hedge funds are seen as unimportant, old financial vehicles of years past. While there are over 8000 funds in operation today, We choose to focus on the moguls of this group, around 850 funds. These hedge fund managers oversee most of the smart money’s total asset base, and by observing their inimitable stock picks, Insider Monkey has brought to light various investment strategies that have historically defeated the broader indices. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .
Chuck Royce of Royce & Associates
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. Now let’s review the fresh hedge fund action encompassing Reliance Steel & Aluminum Co. (NYSE:RS).
What have hedge funds been doing with Reliance Steel & Aluminum Co. (NYSE:RS)?
At Q4’s end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 42% from the previous quarter. On the other hand, there were a total of 20 hedge funds with a bullish position in RS a year ago. With hedge funds’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Reliance Steel & Aluminum Co. (NYSE:RS), with a stake worth $85.1 million reported as of the end of September. Trailing Royce & Associates was AQR Capital Management, which amassed a stake valued at $71.6 million. Scopus Asset Management, Renaissance Technologies, and Luminus 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 Scopus Asset Management allocated the biggest weight to Reliance Steel & Aluminum Co. (NYSE:RS), around 1.72% of its 13F portfolio. Sprott Asset Management is also relatively very bullish on the stock, earmarking 1.61 percent of its 13F equity portfolio to RS.
As aggregate interest increased, key hedge funds have jumped into Reliance Steel & Aluminum Co. (NYSE:RS) headfirst. Luminus Management, managed by Jonathan Barrett and Paul Segal, initiated the most outsized position in Reliance Steel & Aluminum Co. (NYSE:RS). Luminus Management had $26.3 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $6.5 million position during the quarter. The other funds with brand new RS positions are Jordan Moelis and Jeff Farroni’s Deep Field Asset Management, Peter Muller’s PDT Partners, and Ran Pang’s Quantamental Technologies.
Let’s go over hedge fund activity in other stocks similar to Reliance Steel & Aluminum Co. (NYSE:RS). These stocks are Kohl’s Corporation (NYSE:KSS), Xerox Corporation (NYSE:XRX), Ares Capital Corporation (NASDAQ:ARCC), and Peloton Interactive, Inc. (NASDAQ:PTON). This group of stocks’ market caps match RS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| KSS | 28 | 405115 | -2 |
| XRX | 39 | 1458893 | 6 |
| ARCC | 22 | 262419 | -1 |
| PTON | 30 | 383046 | 3 |
| Average | 29.75 | 627368 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $627 million. That figure was $390 million in RS’s case. Xerox Corporation (NYSE:XRX) is the most popular stock in this table. On the other hand Ares Capital Corporation (NASDAQ:ARCC) is the least popular one with only 22 bullish hedge fund positions. Reliance Steel & Aluminum Co. (NYSE:RS) 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 RS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on RS were disappointed as the stock returned -32.3% 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.
