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Did Hedge Funds Make The Right Call On Archer Daniels Midland Company (ADM) ?

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 (see why hell is coming). 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 Archer Daniels Midland Company (NYSE:ADM) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Archer Daniels Midland Company (NYSE:ADM) a splendid stock to buy now? Investors who are in the know were getting more bullish. The number of long hedge fund bets moved up by 4 in recent months. Our calculations also showed that ADM 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 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 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 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.

Jonathan Barrett Luminus Management

Jonathan Barrett of Luminus Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. 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 view the new hedge fund action regarding Archer Daniels Midland Company (NYSE:ADM).

What have hedge funds been doing with Archer Daniels Midland Company (NYSE:ADM)?

At the end of the first quarter, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the fourth quarter of 2019. On the other hand, there were a total of 25 hedge funds with a bullish position in ADM 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 Archer Daniels Midland Company (NYSE:ADM) was held by Diamond Hill Capital, which reported holding $167.4 million worth of stock at the end of September. It was followed by Levin Easterly Partners with a $101.2 million position. Other investors bullish on the company included Markel Gayner Asset Management, Arrowstreet Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Levin Easterly Partners allocated the biggest weight to Archer Daniels Midland Company (NYSE:ADM), around 4.49% of its 13F portfolio. Centenus Global Management is also relatively very bullish on the stock, setting aside 1.61 percent of its 13F equity portfolio to ADM.

Consequently, specific money managers have jumped into Archer Daniels Midland Company (NYSE:ADM) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most valuable position in Archer Daniels Midland Company (NYSE:ADM). Arrowstreet Capital had $51.1 million invested in the company at the end of the quarter. Thomas E. Claugus’s GMT Capital also made a $11 million investment in the stock during the quarter. The other funds with brand new ADM positions are Jonathan Barrett and Paul Segal’s Luminus Management, Michael Gelband’s ExodusPoint Capital, and Steve Cohen’s Point72 Asset Management.

Let’s check out hedge fund activity in other stocks similar to Archer Daniels Midland Company (NYSE:ADM). We will take a look at Ecopetrol S.A. (NYSE:EC), Liberty Broadband Corp (NASDAQ:LBRDA), Nutrien Ltd. (NYSE:NTR), and Xilinx, Inc. (NASDAQ:XLNX). All of these stocks’ market caps are similar to ADM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EC 12 107803 1
LBRDA 26 655556 2
NTR 22 269579 -6
XLNX 38 635591 -4
Average 24.5 417132 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $417 million. That figure was $564 million in ADM’s case. Xilinx, Inc. (NASDAQ:XLNX) is the most popular stock in this table. On the other hand Ecopetrol S.A. (NYSE:EC) is the least popular one with only 12 bullish hedge fund positions. Archer Daniels Midland Company (NYSE:ADM) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately ADM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ADM were disappointed as the stock returned 14.6% 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 many of these stocks already outperformed the market so far this year.

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