Was The Smart Money Right About CF Industries Holdings, Inc. (CF)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards CF Industries Holdings, Inc. (NYSE:CF).

CF Industries Holdings, Inc. (NYSE:CF) has seen an increase in enthusiasm from smart money in recent months. CF Industries Holdings, Inc. (NYSE:CF) was in 37 hedge funds’ portfolios at the end of June. The all time high for this statistics is 50. Our calculations also showed that CF isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 56 percentage points since March 2017 (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.

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we’re going to review the fresh hedge fund action encompassing CF Industries Holdings, Inc. (NYSE:CF).

What does smart money think about CF Industries Holdings, Inc. (NYSE:CF)?

At second quarter’s end, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. By comparison, 35 hedge funds held shares or bullish call options in CF a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in CF Industries Holdings, Inc. (NYSE:CF) was held by D E Shaw, which reported holding $104.8 million worth of stock at the end of June. It was followed by Glendon Capital Management with a $99.7 million position. Other investors bullish on the company included Greenhaven Associates, Adage Capital Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Glendon Capital Management allocated the biggest weight to CF Industries Holdings, Inc. (NYSE:CF), around 26.25% of its 13F portfolio. Moon Capital is also relatively very bullish on the stock, setting aside 6.53 percent of its 13F equity portfolio to CF.

As one would reasonably expect, some big names have been driving this bullishness. Greenhaven Associates, managed by Edgar Wachenheim, established the most valuable position in CF Industries Holdings, Inc. (NYSE:CF). Greenhaven Associates had $97.3 million invested in the company at the end of the quarter. Michael Cowley’s Sandbar Asset Management also made a $5.9 million investment in the stock during the quarter. The following funds were also among the new CF investors: Noam Gottesman’s GLG Partners, C. Jonathan Gattman’s Cloverdale Capital Management, and Greg Eisner’s Engineers Gate Manager.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as CF Industries Holdings, Inc. (NYSE:CF) but similarly valued. These stocks are AECOM (NYSE:ACM), Owens Corning (NYSE:OC), Vroom, Inc. (NASDAQ:VRM), ANGI Homeservices Inc (NASDAQ:ANGI), Manhattan Associates, Inc. (NASDAQ:MANH), Canopy Growth Corporation (NYSE:CGC), and Post Holdings Inc (NYSE:POST). This group of stocks’ market values match CF’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.1 hedge funds with bullish positions and the average amount invested in these stocks was $537 million. That figure was $548 million in CF’s case. ANGI Homeservices Inc (NASDAQ:ANGI) is the most popular stock in this table. On the other hand Canopy Growth Corporation (NYSE:CGC) is the least popular one with only 11 bullish hedge fund positions. CF Industries Holdings, Inc. (NYSE:CF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CF is 65.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately CF wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CF were disappointed as the stock returned -1% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.