Hedge Funds Were Selling Continental Resources, Inc. (CLR) Before The Coronavirus

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 (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Continental Resources, Inc. (NYSE:CLR) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Continental Resources, Inc. (NYSE:CLR) was in 38 hedge funds’ portfolios at the end of the fourth quarter of 2019. CLR investors should pay attention to a decrease in enthusiasm from smart money lately. There were 39 hedge funds in our database with CLR holdings at the end of the previous quarter. Our calculations also showed that CLR isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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.

David E. Shaw of D.E. Shaw

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. With all of this in mind we’re going to check out the new hedge fund action surrounding Continental Resources, Inc. (NYSE:CLR).

Hedge fund activity in Continental Resources, Inc. (NYSE:CLR)

Heading into the first quarter of 2020, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the third quarter of 2019. On the other hand, there were a total of 36 hedge funds with a bullish position in CLR a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Continental Resources, Inc. (NYSE:CLR) was held by D E Shaw, which reported holding $144.2 million worth of stock at the end of September. It was followed by Millennium Management with a $81.5 million position. Other investors bullish on the company included Encompass Capital Advisors, Point72 Asset Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Encompass Capital Advisors allocated the biggest weight to Continental Resources, Inc. (NYSE:CLR), around 4.44% of its 13F portfolio. Southport Management is also relatively very bullish on the stock, earmarking 3.25 percent of its 13F equity portfolio to CLR.

Due to the fact that Continental Resources, Inc. (NYSE:CLR) has faced a decline in interest from the smart money, we can see that there is a sect of fund managers that decided to sell off their positions entirely heading into Q4. At the top of the heap, Vince Maddi and Shawn Brennan’s SIR Capital Management sold off the largest investment of all the hedgies followed by Insider Monkey, valued at about $30.6 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also sold off its stock, about $9.7 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Continental Resources, Inc. (NYSE:CLR) but similarly valued. We will take a look at W.R. Berkley Corporation (NYSE:WRB), Vornado Realty Trust (NYSE:VNO), Teledyne Technologies Incorporated (NYSE:TDY), and Centrais Eletricas Brasileiras SA (NYSE:EBR). This group of stocks’ market valuations resemble CLR’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $419 million. That figure was $570 million in CLR’s case. W.R. Berkley Corporation (NYSE:WRB) is the most popular stock in this table. On the other hand Centrais Eletricas Brasileiras SA (NYSE:EBR) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Continental Resources, Inc. (NYSE:CLR) 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 22.3% in 2020 through March 16th and still beat the market by 3.2 percentage points. Unfortunately CLR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CLR were disappointed as the stock returned -73.8% during the first two and a half months of 2020 (through March 16th) 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.

Disclosure: None. This article was originally published at Insider Monkey.