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Did Hedge Funds Make The Right Call On SM Energy Company (SM) ?

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 SM Energy Company (NYSE:SM) at the end of the first quarter and determine whether the smart money was really smart about this stock.

SM Energy Company (NYSE:SM) has experienced a decrease in enthusiasm from smart money in recent months. SM was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. There were 22 hedge funds in our database with SM positions at the end of the previous quarter. Our calculations also showed that SM 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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 let’s check out the fresh hedge fund action encompassing SM Energy Company (NYSE:SM).

How are hedge funds trading SM Energy Company (NYSE:SM)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in SM a year ago. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Israel Englander’s Millennium Management has the most valuable position in SM Energy Company (NYSE:SM), worth close to $4.7 million, comprising less than 0.1%% of its total 13F portfolio. On Millennium Management’s heels is Ken Griffin of Citadel Investment Group, with a $4.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that hold long positions contain D. E. Shaw’s D E Shaw, Renaissance Technologies and Anand Parekh’s Alyeska Investment Group. In terms of the portfolio weights assigned to each position PDT Partners allocated the biggest weight to SM Energy Company (NYSE:SM), around 0.05% of its 13F portfolio. Alyeska Investment Group is also relatively very bullish on the stock, dishing out 0.03 percent of its 13F equity portfolio to SM.

Because SM Energy Company (NYSE:SM) has faced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there were a few hedgies that slashed their entire stakes last quarter. It’s worth mentioning that Todd J. Kantor’s Encompass Capital Advisors cut the largest investment of the “upper crust” of funds watched by Insider Monkey, worth an estimated $31.2 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund cut about $7.7 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 5 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to SM Energy Company (NYSE:SM). These stocks are SeaChange International, Inc. (NASDAQ:SEAC), MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT), Tortoise Energy Infrastructure Corporation (NYSE:TYG), and Richmond Mutual Bancorporation, Inc. (NASDAQ:RMBI). This group of stocks’ market caps match SM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SEAC 14 11186 2
MCFT 20 54690 2
TYG 2 533 1
RMBI 5 3065 1
Average 10.25 17369 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $17 million. That figure was $20 million in SM’s case. MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT) is the most popular stock in this table. On the other hand Tortoise Energy Infrastructure Corporation (NYSE:TYG) is the least popular one with only 2 bullish hedge fund positions. SM Energy Company (NYSE:SM) 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 SM as the stock returned 191.1% 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.