You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund investors like Carl Icahn and George Soros hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks.
NOW Inc (NYSE:DNOW) was in 11 hedge funds’ portfolios at the end of the third quarter of 2018. DNOW investors should be aware of an increase in enthusiasm from smart money recently. There were 9 hedge funds in our database with DNOW positions at the end of the previous quarter. Our calculations also showed that dnow isn’t among the 30 most popular stocks among hedge funds.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 18 percentage points since May 2014 through December 3, 2018 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
We’re going to check out the key hedge fund action regarding NOW Inc (NYSE:DNOW).
How have hedgies been trading NOW Inc (NYSE:DNOW)?
At Q3’s end, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 22% from the second quarter of 2018. On the other hand, there were a total of 10 hedge funds with a bullish position in DNOW at the beginning of this year. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
Among these funds, D E Shaw held the most valuable stake in NOW Inc (NYSE:DNOW), which was worth $25.2 million at the end of the third quarter. On the second spot was Cove Street Capital which amassed $20.7 million worth of shares. Moreover, Millennium Management, Renaissance Technologies, and Citadel Investment Group were also bullish on NOW Inc (NYSE:DNOW), allocating a large percentage of their portfolios to this stock.
With a general bullishness amongst the heavyweights, key hedge funds were leading the bulls’ herd. Point72 Asset Management, managed by Steve Cohen, initiated the largest position in NOW Inc (NYSE:DNOW). Point72 Asset Management had $0.4 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also made a $0.3 million investment in the stock during the quarter. The only other fund with a brand new DNOW position is Jeffrey Talpins’s Element Capital Management.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as NOW Inc (NYSE:DNOW) but similarly valued. We will take a look at B&G Foods, Inc. (NYSE:BGS), Flagstar Bancorp Inc (NYSE:FBC), Hailiang Education Group Inc. (NASDAQ:HLG), and Kaiser Aluminum Corp. (NASDAQ:KALU). This group of stocks’ market valuations are similar to DNOW’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BGS | 13 | 82364 | -2 |
| FBC | 15 | 167894 | -6 |
| HLG | 4 | 8415 | -1 |
| KALU | 17 | 135515 | 4 |
| Average | 12.25 | 98547 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $99 million. That figure was $79 million in DNOW’s case. Kaiser Aluminum Corp. (NASDAQ:KALU) is the most popular stock in this table. On the other hand Hailiang Education Group Inc. (NASDAQ:HLG) is the least popular one with only 4 bullish hedge fund positions. NOW Inc (NYSE:DNOW) 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. In this regard KALU might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
