We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Valhi, Inc. (NYSE:VHI).
Valhi, Inc. (NYSE:VHI) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 6 hedge funds’ portfolios at the end of the third quarter of 2019. At the end of this article we will also compare VHI to other stocks including DMC Global Inc. (NASDAQ:BOOM), Preferred Apartment Communities Inc. (NYSE:APTS), and Ribbon Communications Inc. (NASDAQ:RBBN) 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.
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.
Roger Ibbotson of Zebra Capital Management
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. Now we’re going to review the fresh hedge fund action encompassing Valhi, Inc. (NYSE:VHI).
How have hedgies been trading Valhi, Inc. (NYSE:VHI)?
At Q3’s end, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in VHI a year ago. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Renaissance Technologies holds the biggest position in Valhi, Inc. (NYSE:VHI). Renaissance Technologies has a $2.8 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is Roger Ibbotson of Zebra Capital Management, with a $0.8 million position; 0.9% of its 13F portfolio is allocated to the company. Remaining members of the smart money that are bullish contain Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Bradley Louis Radoff’s Fondren Management and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Valhi, Inc. (NYSE:VHI), around 0.85% of its 13F portfolio. Fondren Management is also relatively very bullish on the stock, designating 0.44 percent of its 13F equity portfolio to VHI.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s now take a look at hedge fund activity in other stocks similar to Valhi, Inc. (NYSE:VHI). These stocks are DMC Global Inc. (NASDAQ:BOOM), Preferred Apartment Communities Inc. (NYSE:APTS), Ribbon Communications Inc. (NASDAQ:RBBN), and QuinStreet Inc (NASDAQ:QNST). This group of stocks’ market caps are similar to VHI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BOOM | 22 | 92343 | 2 |
| APTS | 6 | 9024 | -1 |
| RBBN | 17 | 46957 | 6 |
| QNST | 19 | 176526 | -2 |
| Average | 16 | 81213 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $81 million. That figure was $5 million in VHI’s case. DMC Global Inc. (NASDAQ:BOOM) is the most popular stock in this table. On the other hand Preferred Apartment Communities Inc. (NYSE:APTS) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Valhi, Inc. (NYSE:VHI) is even less popular than APTS. Hedge funds dodged a bullet by taking a bearish stance towards VHI. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately VHI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); VHI investors were disappointed as the stock returned 2.1% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
