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. With this in mind let’s see whether Innospec Inc. (NASDAQ:IOSP) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Innospec Inc. (NASDAQ:IOSP) investors should be aware of a decrease in hedge fund sentiment recently. IOSP was in 18 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 20 hedge funds in our database with IOSP holdings at the end of the previous quarter. Our calculations also showed that IOSP 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).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.
Chuck Royce of Royce & Associates
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 let’s view the key hedge fund action encompassing Innospec Inc. (NASDAQ:IOSP).
How are hedge funds trading Innospec Inc. (NASDAQ:IOSP)?
Heading into the first quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in IOSP over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Innospec Inc. (NASDAQ:IOSP) was held by Royce & Associates, which reported holding $61.3 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $13.8 million position. Other investors bullish on the company included Huber Capital Management, Intrinsic Edge Capital, and GLG Partners. In terms of the portfolio weights assigned to each position Huber Capital Management allocated the biggest weight to Innospec Inc. (NASDAQ:IOSP), around 1.16% of its 13F portfolio. Intrinsic Edge Capital is also relatively very bullish on the stock, setting aside 1.02 percent of its 13F equity portfolio to IOSP.
Seeing as Innospec Inc. (NASDAQ:IOSP) has experienced a decline in interest from the smart money, logic holds that there exists a select few hedge funds that decided to sell off their positions entirely in the third quarter. Interestingly, Minhua Zhang’s Weld Capital Management dumped the largest stake of all the hedgies tracked by Insider Monkey, comprising an estimated $0.9 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also dumped its stock, about $0.5 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds in the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Innospec Inc. (NASDAQ:IOSP) but similarly valued. We will take a look at Werner Enterprises, Inc. (NASDAQ:WERN), Premier Inc (NASDAQ:PINC), Artisan Partners Asset Management Inc (NYSE:APAM), and Box, Inc. (NYSE:BOX). All of these stocks’ market caps are similar to IOSP’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| WERN | 21 | 140926 | 1 |
| PINC | 14 | 219803 | -7 |
| APAM | 16 | 265487 | 3 |
| BOX | 35 | 545303 | 2 |
| Average | 21.5 | 292880 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $293 million. That figure was $114 million in IOSP’s case. Box, Inc. (NYSE:BOX) is the most popular stock in this table. On the other hand Premier Inc (NASDAQ:PINC) is the least popular one with only 14 bullish hedge fund positions. Innospec Inc. (NASDAQ:IOSP) 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 IOSP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); IOSP investors were disappointed as the stock returned -35.3% 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.
