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Did Hedge Funds Make The Right Call On NOW Inc (DNOW) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding NOW Inc (NYSE:DNOW) and determine whether hedge funds had an edge regarding this stock.

NOW Inc (NYSE:DNOW) investors should be aware of a decrease in hedge fund sentiment recently. DNOW was in 19 hedge funds’ portfolios at the end of the first quarter of 2020. There were 21 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 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Jonathan Barrett Luminus Management

Jonathan Barrett of Luminus ManagementJonathan Barrett

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a gander at the new hedge fund action regarding NOW Inc (NYSE:DNOW).

How are hedge funds trading NOW Inc (NYSE:DNOW)?

At Q1’s end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in DNOW a year ago. With hedgies’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of NOW Inc (NYSE:DNOW), with a stake worth $16.3 million reported as of the end of September. Trailing Renaissance Technologies was Luminus Management, which amassed a stake valued at $10.9 million. D E Shaw, AQR Capital Management, and Hosking Partners 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 Luminus Management allocated the biggest weight to NOW Inc (NYSE:DNOW), around 1.13% of its 13F portfolio. SIR Capital Management is also relatively very bullish on the stock, earmarking 0.47 percent of its 13F equity portfolio to DNOW.

Because NOW Inc (NYSE:DNOW) has faced falling interest from the smart money, logic holds that there was a specific group of hedge funds that slashed their positions entirely by the end of the first quarter. It’s worth mentioning that Paul Marshall and Ian Wace’s Marshall Wace LLP sold off the biggest position of all the hedgies tracked by Insider Monkey, valued at an estimated $8.7 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund sold off about $5.6 million worth. These moves are interesting, as total hedge fund interest fell by 2 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks similar to NOW Inc (NYSE:DNOW). We will take a look at TORM plc (NASDAQ:TRMD), Invesco Mortgage Capital Inc (NYSE:IVR), Ambac Financial Group, Inc. (NYSE:AMBC), and Collegium Pharmaceutical Inc (NASDAQ:COLL). This group of stocks’ market valuations are similar to DNOW’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TRMD 4 419530 1
IVR 15 19381 0
AMBC 15 51461 0
COLL 21 170373 2
Average 13.75 165186 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $165 million. That figure was $55 million in DNOW’s case. Collegium Pharmaceutical Inc (NASDAQ:COLL) is the most popular stock in this table. On the other hand TORM plc (NASDAQ:TRMD) is the least popular one with only 4 bullish hedge fund positions. NOW Inc (NYSE:DNOW) is not the most popular stock in this group but hedge fund interest is still above 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 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on DNOW as the stock returned 69.4% since Q1 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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