Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves.
Steel Dynamics, Inc. (NASDAQ:STLD) was in 31 hedge funds’ portfolios at the end of the second quarter of 2019. STLD investors should pay attention to an increase in hedge fund interest of late. There were 27 hedge funds in our database with STLD holdings at the end of the previous quarter. Our calculations also showed that STLD isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to 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 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to go over the recent hedge fund action surrounding Steel Dynamics, Inc. (NASDAQ:STLD).
What does smart money think about Steel Dynamics, Inc. (NASDAQ:STLD)?
At Q2’s end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in STLD a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
Among these funds, D E Shaw held the most valuable stake in Steel Dynamics, Inc. (NASDAQ:STLD), which was worth $151.7 million at the end of the second quarter. On the second spot was AQR Capital Management which amassed $83.6 million worth of shares. Moreover, Millennium Management, Citadel Investment Group, and Renaissance Technologies were also bullish on Steel Dynamics, Inc. (NASDAQ:STLD), allocating a large percentage of their portfolios to this stock.
With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Point72 Asset Management, managed by Steve Cohen, assembled the most valuable position in Steel Dynamics, Inc. (NASDAQ:STLD). Point72 Asset Management had $35.8 million invested in the company at the end of the quarter. Todd J. Kantor’s Encompass Capital Advisors also initiated a $10.6 million position during the quarter. The following funds were also among the new STLD investors: Alexander Mitchell’s Scopus Asset Management, Matthew Hulsizer’s PEAK6 Capital Management, and Lee Ainslie’s Maverick Capital.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Steel Dynamics, Inc. (NASDAQ:STLD) but similarly valued. We will take a look at East West Bancorp, Inc. (NASDAQ:EWBC), Assurant, Inc. (NYSE:AIZ), Dunkin Brands Group Inc (NASDAQ:DNKN), and The Madison Square Garden Company (NYSE:MSG). This group of stocks’ market caps are similar to STLD’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EWBC | 28 | 378757 | -1 |
| AIZ | 29 | 515543 | -10 |
| DNKN | 23 | 335111 | 1 |
| MSG | 50 | 1807738 | -2 |
| Average | 32.5 | 759287 | -3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $759 million. That figure was $591 million in STLD’s case. The Madison Square Garden Company (NYSE:MSG) is the most popular stock in this table. On the other hand Dunkin Brands Group Inc (NASDAQ:DNKN) is the least popular one with only 23 bullish hedge fund positions. Steel Dynamics, Inc. (NASDAQ:STLD) 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately STLD wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); STLD investors were disappointed as the stock returned -0.5% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.
