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Hedge Funds Are Dipping Their Toes Into SM Energy Company (SM)

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of SM Energy Company (NYSE:SM) based on that data and determine whether they were really smart about the stock.

Is SM Energy Company (NYSE:SM) undervalued? Prominent investors were getting more optimistic. The number of bullish hedge fund bets went up by 1 lately. SM Energy Company (NYSE:SM) was in 18 hedge funds’ portfolios at the end of June. The all time high for this statistics is 32. Our calculations also showed that SM 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). There were 17 hedge funds in our database with SM positions at the end of the first 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 56 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.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to view the latest hedge fund action regarding SM Energy Company (NYSE:SM).

How are hedge funds trading SM Energy Company (NYSE:SM)?

At the end of June, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in SM over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, D E Shaw held the most valuable stake in SM Energy Company (NYSE:SM), which was worth $19.6 million at the end of the third quarter. On the second spot was Millennium Management which amassed $18.5 million worth of shares. Citadel Investment Group, Arrowstreet Capital, and Paloma Partners 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 Paloma Partners allocated the biggest weight to SM Energy Company (NYSE:SM), around 0.14% of its 13F portfolio. JS Capital is also relatively very bullish on the stock, designating 0.04 percent of its 13F equity portfolio to SM.

Consequently, key money managers have been driving this bullishness. Point72 Asset Management, managed by Steve Cohen, established the most valuable position in SM Energy Company (NYSE:SM). Point72 Asset Management had $2.4 million invested in the company at the end of the quarter. Jonathan Soros’s JS Capital also made a $0.5 million investment in the stock during the quarter. The other funds with brand new SM positions are Parvinder Thiara’s Athanor Capital, Dmitry Balyasny’s Balyasny Asset Management, and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as SM Energy Company (NYSE:SM) but similarly valued. We will take a look at Graf Industrial Corp. (NYSE:GRAF), Uxin Limited (NASDAQ:UXIN), Energy Recovery, Inc. (NASDAQ:ERII), Peoples Utah Bancorp (NASDAQ:PUB), Tekla Life Sciences Investors (NYSE:HQL), Catasys, Inc. (NASDAQ:CATS), and Agilysys, Inc. (NASDAQ:AGYS). All of these stocks’ market caps are closest to SM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GRAF 16 145165 5
UXIN 2 5721 -3
ERII 12 49802 1
PUB 4 14054 -3
HQL 2 1046 1
CATS 11 19290 3
AGYS 19 134503 5
Average 9.4 52797 1.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.4 hedge funds with bullish positions and the average amount invested in these stocks was $53 million. That figure was $71 million in SM’s case. Agilysys, Inc. (NASDAQ:AGYS) is the most popular stock in this table. On the other hand Uxin Limited (NASDAQ:UXIN) is the least popular one with only 2 bullish hedge fund positions. SM Energy Company (NYSE:SM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SM is 69.9. 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately SM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SM were disappointed as the stock returned -57.6% in Q3 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.