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Did Hedge Funds Make The Right Call On United States Steel Corporation (X)?

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 United States Steel Corporation (NYSE:X) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is United States Steel Corporation (NYSE:X) a buy here? The best stock pickers were getting less optimistic. The number of bullish hedge fund bets retreated by 9 lately. Our calculations also showed that X 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). X was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. There were 26 hedge funds in our database with X holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Jonathan Barrett Luminus Management

Jonathan Barrett of Luminus 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. Now let’s analyze the new hedge fund action encompassing United States Steel Corporation (NYSE:X).

What have hedge funds been doing with United States Steel Corporation (NYSE:X)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -35% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in X a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

More specifically, Citadel Investment Group was the largest shareholder of United States Steel Corporation (NYSE:X), with a stake worth $19.9 million reported as of the end of September. Trailing Citadel Investment Group was Luminus Management, which amassed a stake valued at $12.4 million. Islet Management, D E Shaw, and OZ Management 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 United States Steel Corporation (NYSE:X), around 1.28% of its 13F portfolio. Islet Management is also relatively very bullish on the stock, designating 1.08 percent of its 13F equity portfolio to X.

Because United States Steel Corporation (NYSE:X) has experienced bearish sentiment from the smart money, it’s safe to say that there exists a select few hedgies who were dropping their positions entirely in the first quarter. At the top of the heap, Todd J. Kantor’s Encompass Capital Advisors dropped the biggest position of the 750 funds watched by Insider Monkey, comprising close to $13.4 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund sold off about $13 million worth. These moves are interesting, as total hedge fund interest dropped by 9 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to United States Steel Corporation (NYSE:X). These stocks are Kaman Corporation (NYSE:KAMN), IAMGOLD Corporation (NYSE:IAG), HNI Corp (NYSE:HNI), and Tennant Company (NYSE:TNC). This group of stocks’ market valuations are similar to X’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KAMN 13 137686 -6
IAG 17 107106 0
HNI 15 47165 -5
TNC 11 89348 0
Average 14 95326 -2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $37 million in X’s case. IAMGOLD Corporation (NYSE:IAG) is the most popular stock in this table. On the other hand Tennant Company (NYSE:TNC) is the least popular one with only 11 bullish hedge fund positions. United States Steel Corporation (NYSE:X) 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 X, though not to the same extent, as the stock returned 28.5% since the end of March and outperformed the market as well.

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