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Did Hedge Funds Make The Right Call On Reliance Steel & Aluminum Co. (RS) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Reliance Steel & Aluminum Co. (NYSE:RS) and determine whether hedge funds skillfully traded this stock.

Is Reliance Steel & Aluminum Co. (NYSE:RS) undervalued? Money managers were taking a pessimistic view. The number of bullish hedge fund positions were cut by 11 recently. Our calculations also showed that RS 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

TUDOR INVESTMENT CORP

Paul Tudor Jones of Tudor Investment Corp

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we’re going to take a gander at the latest hedge fund action regarding Reliance Steel & Aluminum Co. (NYSE:RS).

How have hedgies been trading Reliance Steel & Aluminum Co. (NYSE:RS)?

At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -32% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in RS 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.

Is RS A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Chuck Royce’s Royce & Associates has the largest position in Reliance Steel & Aluminum Co. (NYSE:RS), worth close to $60.2 million, accounting for 0.8% of its total 13F portfolio. The second largest stake is held by Cliff Asness of AQR Capital Management, with a $48.2 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other professional money managers that are bullish comprise Israel Englander’s Millennium Management, Jonathan Barrett and Paul Segal’s Luminus Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Luminus Management allocated the biggest weight to Reliance Steel & Aluminum Co. (NYSE:RS), around 1.85% of its 13F portfolio. Scopus Asset Management is also relatively very bullish on the stock, setting aside 1.13 percent of its 13F equity portfolio to RS.

Judging by the fact that Reliance Steel & Aluminum Co. (NYSE:RS) has faced falling interest from the aggregate hedge fund industry, we can see that there were a few hedge funds who sold off their entire stakes heading into Q4. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the biggest stake of the 750 funds tracked by Insider Monkey, worth close to $6.5 million in stock. Paul Tudor Jones’s fund, Tudor Investment Corp, also cut its stock, about $4 million worth. These transactions are important to note, as total hedge fund interest dropped by 11 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Reliance Steel & Aluminum Co. (NYSE:RS) but similarly valued. These stocks are IPG Photonics Corporation (NASDAQ:IPGP), Natura &Co Holding S.A. (NYSE:NTCO), Proofpoint Inc (NASDAQ:PFPT), and Generac Holdings Inc. (NYSE:GNRC). This group of stocks’ market caps are similar to RS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IPGP 20 150252 -5
NTCO 8 66680 8
PFPT 27 315504 -8
GNRC 29 192057 -3
Average 21 181123 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $181 million. That figure was $211 million in RS’s case. Generac Holdings Inc. (NYSE:GNRC) is the most popular stock in this table. On the other hand Natura &Co Holding S.A. (NYSE:NTCO) is the least popular one with only 8 bullish hedge fund positions. Reliance Steel & Aluminum Co. (NYSE:RS) 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 RS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RS were disappointed as the stock returned 9.1% 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.