Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Stantec Inc. (NYSE:STN).
Hedge fund interest in Stantec Inc. (NYSE:STN) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare STN to other stocks including First Financial Bancorp (NASDAQ:FFBC), Altera Corporation (NASDAQ:ALTR), and Spirit Airlines Incorporated (NASDAQ:SAVE) to get a better sense of its popularity.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
David E. Shaw of D.E. Shaw
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 view the key hedge fund action encompassing Stantec Inc. (NYSE:STN).
What does smart money think about Stantec Inc. (NYSE:STN)?
At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2019. By comparison, 5 hedge funds held shares or bullish call options in STN a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
The largest stake in Stantec Inc. (NYSE:STN) was held by Luminus Management, which reported holding $69.3 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $5.9 million position. Other investors bullish on the company included Renaissance Technologies, Two Sigma Advisors, and D E Shaw. In terms of the portfolio weights assigned to each position Luminus Management allocated the biggest weight to Stantec Inc. (NYSE:STN), around 2.01% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, earmarking 0.01 percent of its 13F equity portfolio to STN.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Marshall Wace).
Let’s go over hedge fund activity in other stocks similar to Stantec Inc. (NYSE:STN). These stocks are First Financial Bancorp (NASDAQ:FFBC), Altera Corporation (NASDAQ:ALTR), Spirit Airlines Incorporated (NASDAQ:SAVE), and Cloudera, Inc. (NYSE:CLDR). This group of stocks’ market valuations are closest to STN’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FFBC | 7 | 14549 | -1 |
| ALTR | 10 | 129177 | -4 |
| SAVE | 24 | 183395 | -7 |
| CLDR | 26 | 652627 | 1 |
| Average | 16.75 | 244937 | -2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $245 million. That figure was $83 million in STN’s case. Cloudera, Inc. (NYSE:CLDR) is the most popular stock in this table. On the other hand First Financial Bancorp (NASDAQ:FFBC) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Stantec Inc. (NYSE:STN) is even less popular than FFBC. Hedge funds clearly dropped the ball on STN as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 STN as the stock returned 20.1% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
