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Flowserve Corporation (FLS): Hedge Fund Sentiment Inching Up

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Flowserve Corporation (NYSE:FLS) and determine whether the smart money was really smart about this stock.

Flowserve Corporation (NYSE:FLS) investors should pay attention to an increase in support from the world’s most elite money managers in recent months. Flowserve Corporation (NYSE:FLS) was in 30 hedge funds’ portfolios at the end of June. The all time high for this statistics is 32. Our calculations also showed that FLS isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 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 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.

Mario Gabelli of GAMCO Investors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let’s go over the key hedge fund action surrounding Flowserve Corporation (NYSE:FLS).

How are hedge funds trading Flowserve Corporation (NYSE:FLS)?

Heading into the third quarter of 2020, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards FLS over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

Among these funds, GAMCO Investors held the most valuable stake in Flowserve Corporation (NYSE:FLS), which was worth $49.7 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $33.5 million worth of shares. Arrowstreet Capital, D E Shaw, and Citadel Investment Group 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 Cerebellum Capital allocated the biggest weight to Flowserve Corporation (NYSE:FLS), around 2.4% of its 13F portfolio. International Value Advisers is also relatively very bullish on the stock, earmarking 1 percent of its 13F equity portfolio to FLS.

Consequently, key money managers were leading the bulls’ herd. International Value Advisers, managed by Charles de Vaulx, established the biggest position in Flowserve Corporation (NYSE:FLS). International Value Advisers had $13.4 million invested in the company at the end of the quarter. Vince Maddi and Shawn Brennan’s SIR Capital Management also made a $3.6 million investment in the stock during the quarter. The following funds were also among the new FLS investors: David Andre and Astro Teller’s Cerebellum Capital, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, and Michael Gelband’s ExodusPoint Capital.

Let’s now review hedge fund activity in other stocks similar to Flowserve Corporation (NYSE:FLS). We will take a look at Grocery Outlet Holding Corp. (NASDAQ:GO), Tempur Sealy International Inc. (NYSE:TPX), Dicks Sporting Goods Inc (NYSE:DKS), Ultrapar Participacoes SA (NYSE:UGP), RLI Corp. (NYSE:RLI), Agios Pharmaceuticals Inc (NASDAQ:AGIO), and Tapestry, Inc. (NYSE:TPR). All of these stocks’ market caps are similar to FLS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GO 19 137772 2
TPX 46 1023259 8
DKS 40 493110 13
UGP 7 38733 2
RLI 20 160243 5
AGIO 30 460464 7
TPR 39 533337 2
Average 28.7 406703 5.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.7 hedge funds with bullish positions and the average amount invested in these stocks was $407 million. That figure was $251 million in FLS’s case. Tempur Sealy International Inc. (NYSE:TPX) is the most popular stock in this table. On the other hand Ultrapar Participacoes SA (NYSE:UGP) is the least popular one with only 7 bullish hedge fund positions. Flowserve Corporation (NYSE:FLS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FLS is 63.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23.8% in 2020 through September 14th and beat the market by 17.6 percentage points. Unfortunately FLS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FLS were disappointed as the stock returned -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.