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 Equitrans Midstream Corporation (NYSE:ETRN).
Is Equitrans Midstream Corporation (NYSE:ETRN) a buy, sell, or hold? The smart money is in a bearish mood. The number of long hedge fund bets went down by 2 in recent months. Our calculations also showed that ETRN 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).
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.
Michael Lowenstein of Kensico Capital
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. Keeping this in mind let’s view the recent hedge fund action encompassing Equitrans Midstream Corporation (NYSE:ETRN).
What does smart money think about Equitrans Midstream Corporation (NYSE:ETRN)?
At Q4’s end, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the third quarter of 2019. On the other hand, there were a total of 28 hedge funds with a bullish position in ETRN a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
Among these funds, Kensico Capital held the most valuable stake in Equitrans Midstream Corporation (NYSE:ETRN), which was worth $118 million at the end of the third quarter. On the second spot was Iridian Asset Management which amassed $112.4 million worth of shares. Schonfeld Strategic Advisors, Point72 Asset Management, and Winton 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 Yaupon Capital allocated the biggest weight to Equitrans Midstream Corporation (NYSE:ETRN), around 2.87% of its 13F portfolio. Kensico Capital is also relatively very bullish on the stock, earmarking 2.46 percent of its 13F equity portfolio to ETRN.
Judging by the fact that Equitrans Midstream Corporation (NYSE:ETRN) has witnessed falling interest from the aggregate hedge fund industry, it’s easy to see that there were a few money managers who were dropping their entire stakes last quarter. It’s worth mentioning that Matt Smith’s Deep Basin Capital sold off the largest position of all the hedgies tracked by Insider Monkey, worth close to $13.8 million in call options, and Steve Pattyn’s Yaupon Capital was right behind this move, as the fund dropped about $3.6 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 2 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Equitrans Midstream Corporation (NYSE:ETRN). We will take a look at Graham Holdings Co (NYSE:GHC), Taro Pharmaceutical Industries Ltd. (NYSE:TARO), Inphi Corporation (NYSE:IPHI), and Watts Water Technologies Inc (NYSE:WTS). This group of stocks’ market caps resemble ETRN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GHC | 18 | 510146 | 0 |
| TARO | 12 | 83139 | 1 |
| IPHI | 31 | 449813 | 0 |
| WTS | 19 | 309415 | -5 |
| Average | 20 | 338128 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $338 million. That figure was $380 million in ETRN’s case. Inphi Corporation (NYSE:IPHI) is the most popular stock in this table. On the other hand Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is the least popular one with only 12 bullish hedge fund positions. Equitrans Midstream Corporation (NYSE:ETRN) 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately ETRN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ETRN investors were disappointed as the stock returned -62.5% 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 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.
