3 Hot Mid-Caps to Buy Now According to Quant Billionaires

Quantitative hedge funds, or quants, are among the hottest and best-performing hedge funds in the world, consistently outpacing the market through their ability to execute thousands of trades in seconds based on any number of strategies or data sets, allowing them to buy and sell stocks at exactly the moment they want to buy and sell them at.

Quants are not only about high frequency trading however, at least not on the surface. They also maintain portfolios of long positions that, while often being subject to plenty of quarterly turnover, nonetheless provide insight into where individual stocks line up in terms of their evaluations, whatever they may be. One of the trends we monitor closely is quant-specific activity, as when multiple quants all make sudden moves into a stock, it’s likely that stock appears undervalued or oversold based on multiple data points.

When looking at the latest hedge fund ownership data, we found three stocks that were being bought by multiple quants in the fourth quarter: CF Industries Holdings, Inc. (NYSE:CF), HollyFrontier Corp (NYSE:HFC), and Watsco Inc (NYSE:WSO). We’ll look at that activity and check out the state of these stocks in this article.

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CF Industries Holdings, Inc. (NYSE:CF)

Quants That Bought Shares of CF in Q4: Jim Simons’ Renaissance Technologies (76,000 shares), David Harding’s Winton Capital (217,768 shares), Ken Griffin’s Citadel Investment Group (53,939 shares), John Overdeck and David Siegel’s Two Sigma Advisors (266,400 shares)

Three of the quants that bought shares were opening new positions in the stock, while Two Sigma Advisors upped its position to 422,190 shares overall, a 171% increase in Q4. CF shares have been hot over the past year, gaining over 40%.

Why Argentine Drought Will Help CF Industries Holdings, Inc. (NYSE:CF): Did quants’ mathematical models predict drought in Argentina in early-2018? That reality has the potential to be a big catalyst for CF Industries shares, improving prices for affected crops like soybeans and corn and driving up fertilizer demand as growers hike production.

Argentina is in the midst of a devastating drought that is threatening to slash the country’s soybean production by as much as 500 million bushels in 2018, or 25% of the 1.98 billion bushels that the USDA’s February WASDE report predicted that Argentina would produce. Cowen analyst Charles Neivert predicts that such a major crop shortfall will lead to a welcome pricing recovery in the fertilizer market.

On the next page we’ll look at two other stocks that were on the radars of quant hedge funds in the fourth quarter.

HollyFrontier Corp (NYSE:HFC)

Quants That Bought Shares of HFC in Q4: Ray Dalio’s Bridgewater Associates (16,123 shares), Jim Simons’ Renaissance Technologies (112,558 shares), David Harding’s Winton Capital (91,250 shares), Cliff Asness’ AQR Capital Management (1.21 million shares)

As with CF Industries Holdings, Inc. (NYSE:CF), three of the above positions were new ones in HollyFrontier Corp (NYSE:HFC), opened during the fourth quarter. Meanwhile, AQR Capital added 1.21 million shares to its position, lifting it to 1.38 million shares overall.

Is There Room to Run for HollyFrontier Corp (NYSE:HFC)?: There was a huge rally in HollyFrontier shares between May 1 and December 1 of last year which has several analysts skeptical about the stock’s prospects for 2018. In the fourth quarter, HollyFrontier exceeded revenue estimates by $220 million, while its adjusted EPS was $0.13 short of estimates as margins declined. That represented a notable slump from Q3, when both revenue and adjusted earnings easily toppled estimates. If crude differentials tighten further, HollyFrontier’s stretched valuation might be at risk.

Watsco Inc (NYSE:WSO)

Quants That Bought Shares of WSO in Q4: Ken Griffin’s Citadel Investment Group (8,824 shares), John Overdeck and David Siegel’s Two Sigma Advisors (16,666 shares), Jim Simons’ Renaissance Technologies (186,900 shares), David Harding’s Winton Capital (34,672 shares), D E Shaw, founded by David E. Shaw (8,918 shares)

While the bulk of the purchases listed above were relatively small, it’s still noteworthy that five different quants opened a new position in Watsco Inc (NYSE:WSO) during the fourth quarter. For reference, there are just nine hedge funds in our database that we consider to be full-blown quant funds. Overall hedge fund ownership also doubled during the fourth quarter to 22 funds.

Watsco Inc (NYSE:WSO) Rapidly Growing Online Sales, Dividend Payments: Watsco is growing into an intriguing income stock after the company announced that it will hike its dividend payments by another 16% beginning next month, to $5.80 per share, pushing its forward yield to 3.35%. Its dividend payments aren’t the only thing being aggressively expanded at the company, which grew online sales to 25% of its overall sales in 2017. Continued success in that area should allow Watsco to improve its operating margins in the coming years.

Disclosure: None