Hedge Funds Are Buying BHP Group (BBL)

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year’s Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to BHP Group (NYSE:BBL) changed recently.

BHP Group (NYSE:BBL) was in 21 hedge funds’ portfolios at the end of the third quarter of 2019. BBL has seen an increase in activity from the world’s largest hedge funds recently. There were 20 hedge funds in our database with BBL positions at the end of the previous quarter. Our calculations also showed that BBL isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
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.

Sander Gerber Hudson Bay Capital Management

Sander Gerber of Hudson Bay Capital Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the recent hedge fund action surrounding BHP Group (NYSE:BBL).

What does smart money think about BHP Group (NYSE:BBL)?

At the end of the third quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in BBL a year ago. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

The largest stake in BHP Group (NYSE:BBL) was held by Arrowstreet Capital, which reported holding $305 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $243.3 million position. Other investors bullish on the company included Polaris Capital Management, LMR Partners, and Hudson Bay Capital Management. In terms of the portfolio weights assigned to each position Polaris Capital Management allocated the biggest weight to BHP Group (NYSE:BBL), around 9.27% of its 13F portfolio. Manikay Partners is also relatively very bullish on the stock, dishing out 2.23 percent of its 13F equity portfolio to BBL.

As industrywide interest jumped, some big names have been driving this bullishness. Hudson Bay Capital Management, managed by Sander Gerber, assembled the most valuable position in BHP Group (NYSE:BBL). Hudson Bay Capital Management had $26.7 million invested in the company at the end of the quarter. Sara Nainzadeh’s Centenus Global Management also made a $6.4 million investment in the stock during the quarter. The following funds were also among the new BBL investors: George Soros’s Soros Fund Management, Dmitry Balyasny’s Balyasny Asset Management, and Steve Cohen’s Point72 Asset Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as BHP Group (NYSE:BBL) but similarly valued. We will take a look at Eli Lilly and Company (NYSE:LLY), GlaxoSmithKline plc (NYSE:GSK), The Toronto-Dominion Bank (NYSE:TD), and NVIDIA Corporation (NASDAQ:NVDA). This group of stocks’ market caps are similar to BBL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LLY 41 1489505 -2
GSK 26 1891012 1
TD 15 295029 -3
NVDA 48 1473439 3
Average 32.5 1287246 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $1287 million. That figure was $971 million in BBL’s case. NVIDIA Corporation (NASDAQ:NVDA) is the most popular stock in this table. On the other hand The Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 15 bullish hedge fund positions. BHP Group (NYSE:BBL) 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 BBL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BBL investors were disappointed as the stock returned 3.7% 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.