Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards South Jersey Industries Inc (NYSE:SJI) to find out whether it was one of their high conviction long-term ideas.
South Jersey Industries Inc (NYSE:SJI) was in 12 hedge funds’ portfolios at the end of September. SJI has experienced a decrease in support from the world’s most elite money managers of late. There were 13 hedge funds in our database with SJI holdings at the end of the previous quarter. Our calculations also showed that SJI 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.
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 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 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.
Ric Dillon of Diamond Hill Capital
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to take a look at the recent hedge fund action encompassing South Jersey Industries Inc (NYSE:SJI).
Hedge fund activity in South Jersey Industries Inc (NYSE:SJI)
At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in SJI a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
More specifically, Diamond Hill Capital was the largest shareholder of South Jersey Industries Inc (NYSE:SJI), with a stake worth $36.6 million reported as of the end of September. Trailing Diamond Hill Capital was Citadel Investment Group, which amassed a stake valued at $7.9 million. Blackstart Capital, Ancora Advisors, and Magnetar Capital 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 Blackstart Capital allocated the biggest weight to South Jersey Industries Inc (NYSE:SJI), around 3.29% of its 13F portfolio. Diamond Hill Capital is also relatively very bullish on the stock, dishing out 0.19 percent of its 13F equity portfolio to SJI.
Since South Jersey Industries Inc (NYSE:SJI) has faced a decline in interest from the smart money, it’s safe to say that there lies a certain “tier” of money managers who sold off their full holdings last quarter. Intriguingly, Ken Griffin’s Citadel Investment Group said goodbye to the biggest investment of the 750 funds followed by Insider Monkey, valued at about $3 million in stock, and David E. Shaw’s D E Shaw was right behind this move, as the fund dropped about $1.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as South Jersey Industries Inc (NYSE:SJI) but similarly valued. These stocks are Hamilton Lane Incorporated (NASDAQ:HLNE), Steven Madden, Ltd. (NASDAQ:SHOO), New Fortress Energy LLC (NASDAQ:NFE), and Yamana Gold Inc. (NYSE:AUY). This group of stocks’ market caps resemble SJI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HLNE | 14 | 98910 | 8 |
| SHOO | 17 | 45054 | 3 |
| NFE | 4 | 30975 | -1 |
| AUY | 20 | 223608 | 2 |
| Average | 13.75 | 99637 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $100 million. That figure was $65 million in SJI’s case. Yamana Gold Inc. (NYSE:AUY) is the most popular stock in this table. On the other hand New Fortress Energy LLC (NASDAQ:NFE) is the least popular one with only 4 bullish hedge fund positions. South Jersey Industries Inc (NYSE:SJI) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SJI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SJI investors were disappointed as the stock returned -5.1% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
