“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Reliance Steel & Aluminum Co. (NYSE:RS) and see how it was affected.
Is Reliance Steel & Aluminum Co. (NYSE:RS) worth your attention right now? The smart money is becoming hopeful. The number of long hedge fund bets rose by 3 lately. Our calculations also showed that RS 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.
Lee Ainslie of Maverick Capital
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s review the recent hedge fund action encompassing Reliance Steel & Aluminum Co. (NYSE:RS).
How have hedgies been trading Reliance Steel & Aluminum Co. (NYSE:RS)?
At Q3’s end, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RS over the last 17 quarters. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
Among these funds, Royce & Associates held the most valuable stake in Reliance Steel & Aluminum Co. (NYSE:RS), which was worth $72.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $58.7 million worth of shares. Scopus Asset Management, Renaissance Technologies, and Winton Capital Management 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 Scopus Asset Management allocated the biggest weight to Reliance Steel & Aluminum Co. (NYSE:RS), around 1.55% of its 13F portfolio. Sprott Asset Management is also relatively very bullish on the stock, earmarking 1.53 percent of its 13F equity portfolio to RS.
As aggregate interest increased, key money managers have jumped into Reliance Steel & Aluminum Co. (NYSE:RS) headfirst. Tudor Investment Corp, managed by Paul Tudor Jones, assembled the largest position in Reliance Steel & Aluminum Co. (NYSE:RS). Tudor Investment Corp had $3.5 million invested in the company at the end of the quarter. Lee Ainslie’s Maverick Capital also initiated a $1.2 million position during the quarter. The other funds with new positions in the stock are Ray Dalio’s Bridgewater Associates, Steve Cohen’s Point72 Asset Management, and Michael Platt and William Reeves’s BlueCrest Capital Mgmt.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Reliance Steel & Aluminum Co. (NYSE:RS) but similarly valued. These stocks are First American Financial Corp (NYSE:FAF), American Campus Communities, Inc. (NYSE:ACC), XPO Logistics Inc (NYSE:XPO), and Dunkin Brands Group Inc (NASDAQ:DNKN). This group of stocks’ market valuations match RS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FAF | 35 | 905288 | 1 |
| ACC | 19 | 407788 | 2 |
| XPO | 23 | 2709456 | -1 |
| DNKN | 24 | 193861 | 1 |
| Average | 25.25 | 1054098 | 0.75 |
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 $1054 million. That figure was $313 million in RS’s case. First American Financial Corp (NYSE:FAF) is the most popular stock in this table. On the other hand American Campus Communities, Inc. (NYSE:ACC) is the least popular one with only 19 bullish hedge fund positions. Reliance Steel & Aluminum Co. (NYSE:RS) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on RS as the stock returned 19% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
