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 (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. 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 Louisiana-Pacific Corporation (NYSE:LPX).
Is Louisiana-Pacific Corporation (NYSE:LPX) a buy here? Investors who are in the know are becoming less confident. The number of long hedge fund bets were cut by 6 recently. Our calculations also showed that LPX 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). LPX was in 29 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 35 hedge funds in our database with LPX holdings at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Jeffrey Altman of Owl Creek Asset Management
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 take a look at the fresh hedge fund action regarding Louisiana-Pacific Corporation (NYSE:LPX).
How are hedge funds trading Louisiana-Pacific Corporation (NYSE:LPX)?
At the end of the fourth quarter, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards LPX over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Phill Gross and Robert Atchinson’s Adage Capital Management has the number one position in Louisiana-Pacific Corporation (NYSE:LPX), worth close to $102.9 million, amounting to 0.3% of its total 13F portfolio. Sitting at the No. 2 spot is Israel Englander of Millennium Management, with a $93.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining members of the smart money that hold long positions contain Renaissance Technologies, Robert Bishop’s Impala Asset Management and Jeffrey Altman’s Owl Creek Asset Management. In terms of the portfolio weights assigned to each position Impala Asset Management allocated the biggest weight to Louisiana-Pacific Corporation (NYSE:LPX), around 6.43% of its 13F portfolio. Owl Creek Asset Management is also relatively very bullish on the stock, setting aside 1.93 percent of its 13F equity portfolio to LPX.
Seeing as Louisiana-Pacific Corporation (NYSE:LPX) has witnessed a decline in interest from hedge fund managers, we can see that there was a specific group of fund managers that elected to cut their entire stakes in the third quarter. Interestingly, Mike Masters’s Masters Capital Management cut the biggest position of the “upper crust” of funds watched by Insider Monkey, valued at close to $12.3 million in stock, and David Brown’s Hawk Ridge Management was right behind this move, as the fund dropped about $7.6 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 6 funds in the third quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Louisiana-Pacific Corporation (NYSE:LPX) but similarly valued. These stocks are J&J Snack Foods Corp. (NASDAQ:JJSF), Energizer Holdings, Inc. (NYSE:ENR), Corelogic Inc (NYSE:CLGX), and BankUnited (NYSE:BKU). This group of stocks’ market caps match LPX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| JJSF | 13 | 121267 | -7 |
| ENR | 22 | 193079 | 3 |
| CLGX | 28 | 383328 | -3 |
| BKU | 25 | 356297 | 1 |
| Average | 22 | 263493 | -1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $263 million. That figure was $566 million in LPX’s case. Corelogic Inc (NYSE:CLGX) is the most popular stock in this table. On the other hand J&J Snack Foods Corp. (NASDAQ:JJSF) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Louisiana-Pacific Corporation (NYSE:LPX) is more popular among hedge funds. 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 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately LPX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on LPX were disappointed as the stock returned -36.9% during the first two and a half months of 2020 (through March 25th) 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 Q1.
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.
