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Did Hedge Funds Make The Right Call On Hess Corporation (HES)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtHess Corporation (NYSE:HES) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Hess Corporation (NYSE:HES) the right pick for your portfolio? Investors who are in the know were turning less bullish. The number of long hedge fund bets were trimmed by 6 in recent months. Our calculations also showed that HES 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). HES was in 28 hedge funds’ portfolios at the end of March. There were 34 hedge funds in our database with HES positions at the end of the previous quarter.

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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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. With all of this in mind let’s analyze the key hedge fund action surrounding Hess Corporation (NYSE:HES).

How have hedgies been trading Hess Corporation (NYSE:HES)?

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HES over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Fisher Asset Management was the largest shareholder of Hess Corporation (NYSE:HES), with a stake worth $84.8 million reported as of the end of September. Trailing Fisher Asset Management was Citadel Investment Group, which amassed a stake valued at $66.5 million. Citadel Investment Group, Balyasny Asset Management, and Two Sigma Advisors 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 Game Creek Capital allocated the biggest weight to Hess Corporation (NYSE:HES), around 3.55% of its 13F portfolio. Leucadia National is also relatively very bullish on the stock, setting aside 2.49 percent of its 13F equity portfolio to HES.

Because Hess Corporation (NYSE:HES) has faced falling interest from hedge fund managers, we can see that there is a sect of hedge funds that decided to sell off their positions entirely last quarter. It’s worth mentioning that Robert Bishop’s Impala Asset Management dumped the largest investment of the 750 funds followed by Insider Monkey, totaling close to $98.9 million in stock, and Michael A. Price and Amos Meron’s Empyrean Capital Partners was right behind this move, as the fund sold off about $63.3 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 6 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Hess Corporation (NYSE:HES) but similarly valued. We will take a look at Discovery Inc. (NASDAQ:DISCA), GSX Techedu Inc. (NYSE:GSX), KeyCorp (NYSE:KEY), and HEICO Corporation (NYSE:HEI). This group of stocks’ market caps are closest to HES’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DISCA 32 233387 -6
GSX 13 204210 3
KEY 43 348822 7
HEI 39 602163 -18
Average 31.75 347146 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.75 hedge funds with bullish positions and the average amount invested in these stocks was $347 million. That figure was $253 million in HES’s case. KeyCorp (NYSE:KEY) is the most popular stock in this table. On the other hand GSX Techedu Inc. (NYSE:GSX) is the least popular one with only 13 bullish hedge fund positions. Hess Corporation (NYSE:HES) 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on HES as the stock returned 56.4% during the second quarter and outperformed the market by an even larger margin.

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