We started seeing tectonic shifts in the market during the third quarter. Small-cap stocks underperformed the large-cap stocks by more than 10 percentage points between the end of June 2015 and the end of June 2016. A mean reversion in trends bumped small-cap stocks’ return to almost 9% in Q3, outperforming their large-cap peers by 5 percentage points. The momentum in small-cap space hasn’t subsided during this quarter either. Small-cap stocks beat large-cap stocks by another 5 percentage points during the first 7 weeks of this quarter. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were boosting their overall exposure and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Royal Dutch Shell plc (ADR) (NYSE:RDS).
Is Royal Dutch Shell plc (ADR) (NYSE:RDS) a great investment today? Money managers are selling, as the number of investors with long positions declined by three in recent months. However, the level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Chevron Corporation (NYSE:CVX), Alibaba Group Holding Ltd (NYSE:BABA), and Novartis AG (ADR) (NYSE:NVS) to gather more data points.
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If you’d ask most market participants, hedge funds are viewed as unimportant, old investment tools of years past. While there are greater than 8000 funds in operation at the moment, Our experts hone in on the bigwigs of this group, approximately 700 funds. These hedge fund managers preside over bulk of all hedge funds’ total asset base, and by shadowing their top equity investments, Insider Monkey has formulated numerous investment strategies that have historically outrun Mr. Market. Insider Monkey’s small-cap hedge fund strategy outrun the S&P 500 index by 12 percentage points a year for a decade in their back tests.
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Keeping this in mind, let’s take a look at the key action surrounding Royal Dutch Shell plc (ADR) (NYSE:RDS).
What does the smart money think about Royal Dutch Shell plc (ADR) (NYSE:RDS)?
At the end of September, 34 funds followed by Insider Monkey were bullish on Royal Dutch Shell, down by 8% over the quarter. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Richard S. Pzena’s Pzena Investment Management holds the largest position in Royal Dutch Shell plc (ADR) (NYSE:RDS). Pzena Investment Management has a $377.4 million position in the stock, comprising 2.3% of its 13F portfolio. The second most bullish fund manager is Magnetar Capital, led by Alec Litowitz and Ross Laser, which holds a $94.4 million position; the fund has 1.5% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism consist of William B. Gray’s Orbis Investment Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Phill Gross and Robert Atchinson’s Adage Capital Management.
Due to the fact that Royal Dutch Shell plc (ADR) (NYSE:RDS) has faced bearish sentiment from the aggregate hedge fund industry, we can see that there is a sect of money managers that slashed their full holdings during the third quarter. At the top of the heap, First Eagle Investment Management cut the biggest stake of the “upper crust” of funds followed by Insider Monkey, valued at an estimated $117.4 million in call options. Neil Chriss’ fund, Hutchin Hill Capital, also cut its call options, about $110.4 million worth.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Royal Dutch Shell plc (ADR) (NYSE:RDS) but similarly valued. We will take a look at Chevron Corporation (NYSE:CVX), Alibaba Group Holding Ltd (NYSE:BABA), Novartis AG (ADR) (NYSE:NVS), and The Coca-Cola Company (NYSE:KO). This group of stocks’ market valuations resemble RDS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CVX | 53 | 2240908 | 6 |
| BABA | 104 | 8267577 | 35 |
| NVS | 26 | 914753 | 4 |
| KO | 53 | 19569276 | -2 |
As you can see these stocks had an average of 59 investors holding shares at the end of September and the average amount invested in these stocks was $7.75 billion. That figure was $955 million in RDS’s case. Alibaba Group Holding Ltd (NYSE:BABA) is the most popular stock in this table. On the other hand Novartis AG (ADR) (NYSE:NVS) is the least popular one with only 26 bullish hedge fund positions. Royal Dutch Shell plc (ADR) (NYSE:RDS) 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, Alibaba Group Holding Ltd (NYSE:BABA) might be a better candidate to consider a long position.
