It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Israel Chemicals Ltd. (NYSE:ICL).
Israel Chemicals Ltd. (NYSE:ICL) was in 5 hedge funds’ portfolios at the end of September. ICL has experienced a decrease in support from the world’s most elite money managers of late. There were 6 hedge funds in our database with ICL positions at the end of the previous quarter. Our calculations also showed that ICL 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.
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 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
John Overdeck of Two Sigma Advisors
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to take a look at the new hedge fund action encompassing Israel Chemicals Ltd. (NYSE:ICL).
What have hedge funds been doing with Israel Chemicals Ltd. (NYSE:ICL)?
At Q3’s end, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. On the other hand, there were a total of 8 hedge funds with a bullish position in ICL a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
The largest stake in Israel Chemicals Ltd. (NYSE:ICL) was held by Arrowstreet Capital, which reported holding $15.5 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $4.4 million position. Other investors bullish on the company included Millennium Management, Citadel Investment Group, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Arrowstreet Capital allocated the biggest weight to Israel Chemicals Ltd. (NYSE:ICL), around 0.04% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, dishing out 0.0037 percent of its 13F equity portfolio to ICL.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: D E Shaw. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified ICL as a viable investment and initiated a position in the stock.
Let’s go over hedge fund activity in other stocks similar to Israel Chemicals Ltd. (NYSE:ICL). We will take a look at Sealed Air Corporation (NYSE:SEE), Haemonetics Corporation (NYSE:HAE), Entegris Inc (NASDAQ:ENTG), and Pentair plc (NYSE:PNR). This group of stocks’ market values are closest to ICL’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SEE | 32 | 950679 | 5 |
| HAE | 21 | 601291 | -2 |
| ENTG | 26 | 807428 | 2 |
| PNR | 22 | 415842 | 1 |
| Average | 25.25 | 693810 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $694 million. That figure was $21 million in ICL’s case. Sealed Air Corporation (NYSE:SEE) is the most popular stock in this table. On the other hand Haemonetics Corporation (NYSE:HAE) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Israel Chemicals Ltd. (NYSE:ICL) is even less popular than HAE. Hedge funds dodged a bullet by taking a bearish stance towards ICL. 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 ICL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ICL investors were disappointed as the stock returned -6.8% 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.
