Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Core Laboratories N.V. (NYSE:CLB).
Core Laboratories N.V. (NYSE:CLB) has experienced a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that CLB isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the recent hedge fund action surrounding Core Laboratories N.V. (NYSE:CLB).
What have hedge funds been doing with Core Laboratories N.V. (NYSE:CLB)?
At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CLB over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Core Laboratories N.V. (NYSE:CLB) was held by Select Equity Group, which reported holding $71.9 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $49.8 million position. Other investors bullish on the company included Citadel Investment Group, PEAK6 Capital Management, and Carlson Capital. In terms of the portfolio weights assigned to each position SIR Capital Management allocated the biggest weight to Core Laboratories N.V. (NYSE:CLB), around 0.72% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, earmarking 0.49 percent of its 13F equity portfolio to CLB.
Seeing as Core Laboratories N.V. (NYSE:CLB) has experienced a decline in interest from the smart money, it’s easy to see that there is a sect of money managers that slashed their full holdings heading into Q4. Interestingly, John W. Rogers’s Ariel Investments said goodbye to the biggest stake of the “upper crust” of funds watched by Insider Monkey, totaling close to $23.5 million in stock, and Ray Dalio’s Bridgewater Associates was right behind this move, as the fund dropped about $11.3 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 7 funds heading into Q4.
Let’s go over hedge fund activity in other stocks similar to Core Laboratories N.V. (NYSE:CLB). We will take a look at National Beverage Corp. (NASDAQ:FIZZ), Everbridge, Inc. (NASDAQ:EVBG), SeaWorld Entertainment Inc (NYSE:SEAS), and Alliance Resource Partners, L.P. (NASDAQ:ARLP). All of these stocks’ market caps are similar to CLB’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FIZZ | 15 | 286562 | -7 |
| EVBG | 27 | 409477 | -1 |
| SEAS | 32 | 998661 | 0 |
| ARLP | 7 | 89565 | -2 |
| Average | 20.25 | 446066 | -2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $446 million. That figure was $150 million in CLB’s case. SeaWorld Entertainment Inc (NYSE:SEAS) is the most popular stock in this table. On the other hand Alliance Resource Partners, L.P. (NASDAQ:ARLP) is the least popular one with only 7 bullish hedge fund positions. Core Laboratories N.V. (NYSE:CLB) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CLB wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CLB investors were disappointed as the stock returned -4.8% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
