Hedge Fund Bullishness on Metal Stocks Hits 3-Year High

Sometimes, hedge funds turn to commodities when they seek investment opportunities. Commodities are good investments during periods of economic growth. One group of commodities that hedge funds have been paying more attention lately are metals, whose prices have been growing amid signals of strong demand and the stock market environment requires new opportunities to invest. Among metals, copper has enjoyed higher prices as demand from China and a weaker US dollar, helped boost the prices to around $7,000 per tonne, which are the highest levels in three-years.

One reason for hedge funds flocking towards metals is the winding down of the oversupply, which had been plaguing on the market until recently. China, which is the leading producer of industrial metals has started to reduce its supplies for climate change-related reason. Metals had been overlooked by many hedge funds for years as the oversupply led to lower prices, which in turn caused some metal-focused hedge funds to shut down. For example, in 2014, Hall Commodities, a London-based $100 million hedge fund closed after less than two years in business, citing poor performance.

However, as interest rates in the US remain low, the stock market enjoys historically high levels, hedge funds turn their attention to metals as they are trying to hedge against a potential market crash and bet that demand will remain strong.  According to S&P Global Market Intelligence data, hedge funds’ investments in metal and mining stocks jumped to $18.52 billion in September, from $10.16 billion in 2015. However, the figures are still lower compared to a peak of investments of $28.98 billion registered in 2010. Barclays estimates that investment in industrial metals, which includes investments in indices and metal-focused ETFs amounted to $27 billion in July, up from $23 billion last year and $14 billion in 2015.

In addition, the US slapped a tariff of 522% on Chinese-made cold-rolled flat steel last year. This suggests that US steel makers should expect more demand, which is why steel companies’ stocks also registered an increase in popularity among hedge funds. The new Washington administration had suggested increased spending on infrastructure, which should provide more demand for raw materials, particularly steel, which is one of the most used metals in construction.

We see similar trends among hedge funds that we track at Insider Monkey. We follow over 650 hedge funds and analyze their quarterly 13F filings to identify their collective sentiment towards different stocks. While this data usually fluctuates, over the longer-term some trends can be identified. Take for example Steel Dynamics, Inc. (NASDAQ:STLD), which manufactures steel, in which there were 36 funds from our database holding shares at the end of June, up from 31 funds a quarter earlier, which is lower than 42 funds that held shares at the end of June. However, at the end of 2015, there were just 28 funds holding shares of Steel Dynamic, Inc. (NASDAQ:STLD). And similar increases in popularity were registered by other metal stocks as well.

We have selected five metal stocks that registered increases in the number of bullish investors during the second quarter of 2017. Let’s take a look at how the bullish sentiment towards them changed over the last couple of years and at the performance of the stocks in question.

1. Steel Dynamics, Inc. (NASDAQ:STLD)

As stated earlier, Steel Dynamics, Inc. (NASDAQ:STLD) saw the number of investors from our database holding shares increase by five to 36 during the second quarter of 2017. At the end of June, these funds held $693.64 million worth of stock, which was equal to around 8% of the company. Moreover, at the beginning of 2016, there were 28 investors long Steel Dynamics, Inc. (NASDAQ:STLD). Since then, the stock surged by 118% as the company managed to increase in revenue and posted a net profit for 2016, helped by growing steel prices. Among the hedge funds we track, Robert Pitts’ Steadfast Capital Management holds the largest stake, which contains 2.98 million shares, up by 28% on the quarter.

2. Nucor Corporation (NYSE:NUE)

In Nucor Corporation (NYSE:NUE), there were 33 funds holding $674.16 million worth of stock at the end of June, up from 24 funds with stakes worth $504.22 million a quarter earlier. Heading into 2016, 20 investors tracked by Insider Monkey were bullish on Nucor Corporation (NYSE:NUE). Since January 2016, Nucor Corporation (NYSE:NUE), a manufacturer of steel and steel products, has seen its stock gain 40%. In May, Credit Suisse upgraded its outlook on the steel industry and pointed out Nucor Corporation (NYSE:NUE) as a company that should generate more profits in its long product and plate segment, which will be driven by the $1.0 trillion infrastructure investment program that had been promised by President Trump. Creidit Suisse also upgraded Nucor’s stock to ‘Outperform’ from ‘Neutral’. Steven Richman’s East Side Capital (RR Partners) and Dmitry Balyasny’s Balyasny Asset Management held 1.91 million shares and 1.47 million shares of Nucor Corporation (NYSE:NUE), respectively, at the end of June.

3. Reliance Steel & Aluminum Co (NYSE:RS)

During the second quarter, the number of investors from our database long Reliance Steel & Aluminum Co (NYSE:RS) inched up by two to 25. Since the end of 2015, this figure jumped by nine. Reliance Steel & Aluminum Co (NYSE:RS)’s stock went up by 32% and the company raised its dividend earlier this year to $0.45 from $0.43, giving its stock a yield of 2.36%. The largest shareholder of Reliance Steel & Aluminum Co (NYSE:RS) among the investors tracked by us is Chuck Royce’s Royce & Associates, which disclosed holding 1.04 million shares in its last 13F.

4. Turquoise Hill Resources Ltd (NYSE:TRQ)

There were 22 funds bullish on Turquoise Hill Resources Ltd (NYSE:TRQ) at the end of June, compared to 20 funds a quarter earlier. The number of investors holding shares inched up by just one compared to the end of 2015, while the stock has advanced by 28% since then. Turquoise Hill Resources Ltd (NYSE:TRQ) is a copper mining company so it has been facing pressure from a depressed commodity market, but things seems to be turning around. Nevertheless, the stock is still 62% in the red over the last five years. During the second quarter, Ken Griffin’s Citadel Advisors boosted its position in Turquoise Hill Resources Ltd (NYSE:TRQ) by 570% to 3.06 million shares.

5. Wheaton Precious Metals Corp (NYSE:WPM)

Last but not least, Wheaton Precious Metals Corp (NYSE:WPM) saw 21 funds holding $276.89 million worth of stock at the end of June. The stock is down by 12% over the last 12 months, as the company was facing pressure from weak gold and silver prices. Nevertheless, last year the company turned to a profit and posted EPS of $0.45 per share, compared to a loss of $0.41 reported for 2015 and its revenue went up to $892 million from $649 million. First Eagle Investment Management initiated a stake in Wheaton Precious Metals Corp (NYSE:WPM) during the second quarter, having amassed 2.55 million shares.

Disclosure: none