Hedge funds don’t get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don’t realize is that 100% of the passive funds didn’t see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. In this article we will take a look at hedge funds’ collective moves over the last 4 years and analyze what the smart money thinks of NOW Inc (NYSE:DNOW) based on that data.
NOW Inc (NYSE:DNOW) was in 21 hedge funds’ portfolios at the end of December. DNOW investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 15 hedge funds in our database with DNOW holdings at the end of the previous quarter. Our calculations also showed that DNOW isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 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 41 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.
Jeffrey Bronchick of Cove Street Capital
We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with 77% accuracy, so we check out his stock picks. A former hedge fund manager is pitching the “next Amazon” in this video; again we are listening. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the fresh hedge fund action regarding NOW Inc (NYSE:DNOW).
What have hedge funds been doing with NOW Inc (NYSE:DNOW)?
At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 40% from the third quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in DNOW a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of NOW Inc (NYSE:DNOW), with a stake worth $26.1 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $21.8 million. AQR Capital Management, Cove Street Capital, and Marshall Wace LLP 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 Cove Street Capital allocated the biggest weight to NOW Inc (NYSE:DNOW), around 1.49% of its 13F portfolio. Hosking Partners is also relatively very bullish on the stock, setting aside 0.14 percent of its 13F equity portfolio to DNOW.
Now, some big names were breaking ground themselves. Winton Capital Management, managed by David Harding, created the most valuable position in NOW Inc (NYSE:DNOW). Winton Capital Management had $4.2 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also made a $2.2 million investment in the stock during the quarter. The other funds with brand new DNOW positions are John Overdeck and David Siegel’s Two Sigma Advisors, Noam Gottesman’s GLG Partners, and Qing Li’s Sciencast Management.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as NOW Inc (NYSE:DNOW) but similarly valued. These stocks are Enanta Pharmaceuticals Inc (NASDAQ:ENTA), Constellation Pharmaceuticals, Inc. (NASDAQ:CNST), Saul Centers Inc (NYSE:BFS), and Range Resources Corp. (NYSE:RRC). All of these stocks’ market caps are closest to DNOW’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ENTA | 21 | 242457 | 4 |
| CNST | 27 | 584990 | 19 |
| BFS | 8 | 41810 | -5 |
| RRC | 29 | 334202 | 2 |
| Average | 21.25 | 300865 | 5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $301 million. That figure was $106 million in DNOW’s case. Range Resources Corp. (NYSE:RRC) is the most popular stock in this table. On the other hand Saul Centers Inc (NYSE:BFS) is the least popular one with only 8 bullish hedge fund positions. NOW Inc (NYSE:DNOW) 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. 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately DNOW wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); DNOW investors were disappointed as the stock returned -47.2% during the same time period 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 most of these stocks already outperformed the market in 2020.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
