Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Celanese Corporation (NYSE:CE).
Celanese Corporation (NYSE:CE) has experienced a decrease in hedge fund interest recently. CE was in 26 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 32 hedge funds in our database with CE holdings at the end of the previous quarter. Our calculations also showed that CE isn’t among the 30 most popular stocks among hedge funds.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Let’s take a look at the new hedge fund action encompassing Celanese Corporation (NYSE:CE).
What does the smart money think about Celanese Corporation (NYSE:CE)?
Heading into the first quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CE over the last 14 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
More specifically, GMT Capital was the largest shareholder of Celanese Corporation (NYSE:CE), with a stake worth $319.2 million reported as of the end of September. Trailing GMT Capital was AQR Capital Management, which amassed a stake valued at $147.4 million. Millennium Management, D E Shaw, and GLG Partners were also very fond of the stock, giving the stock large weights in their portfolios.
Because Celanese Corporation (NYSE:CE) has experienced declining sentiment from the smart money, it’s easy to see that there lies a certain “tier” of hedge funds that decided to sell off their entire stakes last quarter. Interestingly, Ken Heebner’s Capital Growth Management dropped the biggest stake of the 700 funds watched by Insider Monkey, totaling about $45.6 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also dumped its stock, about $22.9 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 6 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Celanese Corporation (NYSE:CE). We will take a look at Fortinet Inc (NASDAQ:FTNT), Chipotle Mexican Grill, Inc. (NYSE:CMG), Hess Corporation (NYSE:HES), and Xylem Inc (NYSE:XYL). This group of stocks’ market caps match CE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FTNT | 33 | 907384 | 5 |
| CMG | 38 | 2036077 | 5 |
| HES | 36 | 1321563 | -1 |
| XYL | 18 | 545153 | -2 |
| Average | 31.25 | 1202544 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $1203 million. That figure was $744 million in CE’s case. Chipotle Mexican Grill, Inc. (NYSE:CMG) is the most popular stock in this table. On the other hand Xylem Inc (NYSE:XYL) is the least popular one with only 18 bullish hedge fund positions. Celanese Corporation (NYSE:CE) 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately CE wasn’t in this group. Hedge funds that bet on CE were disappointed as the stock returned 13.1% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.
