Were Hedge Funds Right About Dumping Quanex Building Products Corporation (NX)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Quanex Building Products Corporation (NYSE:NX) based on that data and determine whether they were really smart about the stock.

Is Quanex Building Products Corporation (NYSE:NX) going to take off soon? The smart money was getting less optimistic. The number of long hedge fund bets dropped by 7 in recent months. Our calculations also showed that NX isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 most profitable companies in the world to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to review the new hedge fund action surrounding Quanex Building Products Corporation (NYSE:NX).

How have hedgies been trading Quanex Building Products Corporation (NYSE:NX)?

At the end of the first quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -35% from the previous quarter. On the other hand, there were a total of 16 hedge funds with a bullish position in NX a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in Quanex Building Products Corporation (NYSE:NX), which was worth $18.5 million at the end of the third quarter. On the second spot was D E Shaw which amassed $5.4 million worth of shares. AQR Capital Management, Arrowstreet Capital, and Citadel Investment Group 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 Renaissance Technologies allocated the biggest weight to Quanex Building Products Corporation (NYSE:NX), around 0.02% of its 13F portfolio. Engineers Gate Manager is also relatively very bullish on the stock, earmarking 0.02 percent of its 13F equity portfolio to NX.

Seeing as Quanex Building Products Corporation (NYSE:NX) has faced bearish sentiment from the smart money, logic holds that there lies a certain “tier” of funds that decided to sell off their full holdings last quarter. Intriguingly, Paul Marshall and Ian Wace’s Marshall Wace LLP cut the largest investment of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $4 million in stock. David Harding’s fund, Winton Capital Management, also said goodbye to its stock, about $1.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 7 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Quanex Building Products Corporation (NYSE:NX) but similarly valued. These stocks are Experience Investment Corp. (NASDAQ:EXPC), Sorrento Therapeutics Inc (NASDAQ:SRNE), Syndax Pharmaceuticals, Inc. (NASDAQ:SNDX), and Puma Biotechnology Inc (NYSE:PBYI). This group of stocks’ market values match NX’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $69 million. That figure was $35 million in NX’s case. Puma Biotechnology Inc (NYSE:PBYI) is the most popular stock in this table. On the other hand Sorrento Therapeutics Inc (NASDAQ:SRNE) is the least popular one with only 5 bullish hedge fund positions. Quanex Building Products Corporation (NYSE:NX) is not the least popular stock in this group but hedge fund interest is still below average. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. A small number of hedge funds were also right about betting on NX, though not to the same extent, as the stock returned 25.9% during the second quarter and outperformed the market.

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