Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant out-performance. These stocks have been on a tear since the end of June, outperforming large-cap index funds by more than 10 percentage points. That’s why we pay special attention to hedge fund activity in these stocks.
Flowserve Corp (NYSE:FLS) was in 26 hedge funds’ portfolios at the end of the third quarter of 2016. FLS shareholders have witnessed a decrease in activity from the world’s largest hedge funds in recent months. There were 32 hedge funds in our database with FLS positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Jacobs Engineering Group Inc (NYSE:JEC), Zillow Inc (NASDAQ:Z), and MarketAxess Holdings Inc. (NASDAQ:MKTX) to gather more data points.
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We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.
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What have hedge funds been doing with Flowserve Corp (NYSE:FLS)?
Heading into the fourth quarter of 2016, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, down by 19% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in FLS at the beginning of this year. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Mario Gabelli’s GAMCO Investors has the most valuable position in Flowserve Corp (NYSE:FLS), worth close to $130.3 million. The second most bullish fund manager is Adage Capital Management, led by Phill Gross and Robert Atchinson, which holds a $71.8 million position. Remaining professional money managers that hold long positions consist of Value Advisers, Paul Marshall and Ian Wace’s Marshall Wace LLP and Ian Simm’s Impax Asset Management. We should note that Impax Asset Management is among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.
Seeing as Flowserve Corp (NYSE:FLS) has weathered bearish sentiment from hedge fund managers, it’s safe to say that there were a few hedgies that decided to sell off their positions entirely heading into Q4. It’s worth mentioning that Jean-Marie Eveillard’s First Eagle Investment Management cashed in the biggest investment of the 700 funds monitored by Insider Monkey, totaling close to $543 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also dropped its stock, about $4.5 million worth.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Flowserve Corp (NYSE:FLS) but similarly valued. We will take a look at Jacobs Engineering Group Inc (NYSE:JEC), Zillow Inc (NASDAQ:Z), MarketAxess Holdings Inc. (NASDAQ:MKTX), and Tyler Technologies, Inc. (NYSE:TYL). All of these stocks’ market caps are similar to FLS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| JEC | 17 | 147916 | -1 |
| Z | 26 | 614342 | 0 |
| MKTX | 20 | 123477 | 0 |
| TYL | 19 | 245181 | -2 |
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $283 million. That figure was $402 million in FLS’s case. Zillow Inc (NASDAQ:Z) is the most popular stock in this table. On the other hand Jacobs Engineering Group Inc (NYSE:JEC) is the least popular one with only 17 bullish hedge fund positions. Flowserve Corp (NYSE:FLS) has the same number of hedge funds as Zillow but the total value of hedge fund positions is materially lower. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds have larger positions. In this regard Z might be a better candidate to consider taking a long position in.
Disclosure: None
