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 the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns 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 Tenaris S.A. (NYSE:TS).
Tenaris S.A. (NYSE:TS) investors should be aware of a decrease in enthusiasm from smart money lately. Our calculations also showed that TS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
John Armitage of Egerton Capital
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a glance at the key hedge fund action surrounding Tenaris S.A. (NYSE:TS).
Hedge fund activity in Tenaris S.A. (NYSE:TS)
At the end of the third quarter, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -31% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in TS over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Egerton Capital Limited was the largest shareholder of Tenaris S.A. (NYSE:TS), with a stake worth $248.6 million reported as of the end of September. Trailing Egerton Capital Limited was Renaissance Technologies, which amassed a stake valued at $106.7 million. Ariel Investments, Millennium Management, and Citadel Investment Group 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 Egerton Capital Limited allocated the biggest weight to Tenaris S.A. (NYSE:TS), around 1.78% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, setting aside 0.3 percent of its 13F equity portfolio to TS.
Because Tenaris S.A. (NYSE:TS) has faced falling interest from the smart money, we can see that there was a specific group of funds that elected to cut their positions entirely last quarter. Intriguingly, Dmitry Balyasny’s Balyasny Asset Management dropped the largest position of all the hedgies followed by Insider Monkey, valued at an estimated $29.4 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund said goodbye to about $21.2 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 5 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to Tenaris S.A. (NYSE:TS). These stocks are NetApp Inc. (NASDAQ:NTAP), Molson Coors Brewing Company (NYSE:TAP), IDEX Corporation (NYSE:IEX), and Jacobs Engineering Group Inc (NYSE:JEC). All of these stocks’ market caps match TS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NTAP | 24 | 735652 | -2 |
| TAP | 23 | 446659 | -2 |
| IEX | 19 | 454463 | 4 |
| JEC | 29 | 1023270 | -3 |
| Average | 23.75 | 665011 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $665 million. That figure was $412 million in TS’s case. Jacobs Engineering Group Inc (NYSE:JEC) is the most popular stock in this table. On the other hand IDEX Corporation (NYSE:IEX) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Tenaris S.A. (NYSE:TS) is even less popular than IEX. Hedge funds dodged a bullet by taking a bearish stance towards TS. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); TS investors were disappointed as the stock returned 1.7% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
