Hedge Funds Are Selling SeaDrill Limited (SDRL)

Is SeaDrill Limited (NYSE:SDRL) a good investment right now? We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

SeaDrill Limited (NYSE:SDRL) was in 17 hedge funds’ portfolios at the end of September. SDRL investors should be aware of a decrease in hedge fund sentiment in recent months. There were 18 hedge funds in our database with SDRL holdings at the end of the previous quarter. Our calculations also showed that SDRL 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.

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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Crispin Odey of Odey Asset Management Group

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 check out the recent hedge fund action surrounding SeaDrill Limited (NYSE:SDRL).

How have hedgies been trading SeaDrill Limited (NYSE:SDRL)?

At the end of the third quarter, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the second quarter of 2019. On the other hand, there were a total of 24 hedge funds with a bullish position in SDRL a year ago. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Among these funds, King Street Capital held the most valuable stake in SeaDrill Limited (NYSE:SDRL), which was worth $14 million at the end of the third quarter. On the second spot was Aristeia Capital which amassed $10.5 million worth of shares. Centerbridge Partners, Odey Asset Management Group, and Shah Capital Management 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 Shah Capital Management allocated the biggest weight to SeaDrill Limited (NYSE:SDRL), around 1.95% of its 13F portfolio. Centerbridge Partners is also relatively very bullish on the stock, earmarking 1.54 percent of its 13F equity portfolio to SDRL.

Since SeaDrill Limited (NYSE:SDRL) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there were a few hedge funds who were dropping their entire stakes heading into Q4. Interestingly, Noam Gottesman’s GLG Partners cut the largest investment of the 750 funds followed by Insider Monkey, worth close to $2.4 million in stock, and Minhua Zhang’s Weld Capital Management was right behind this move, as the fund said goodbye to about $0.3 million worth. These transactions are important to note, as total hedge fund interest was cut by 1 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to SeaDrill Limited (NYSE:SDRL). We will take a look at Earthstone Energy, Inc. (NYSE:ESTE), Stereotaxis Inc (NYSEAMERICAN:STXS), First Business Financial Services Inc (NASDAQ:FBIZ), and Americas Gold and Silver Corporation (NYSEAMERICAN:USAS). All of these stocks’ market caps resemble SDRL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ESTE 8 856 1
STXS 7 90884 6
FBIZ 3 6962 1
USAS 3 1836 1
Average 5.25 25135 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.25 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $53 million in SDRL’s case. Earthstone Energy, Inc. (NYSE:ESTE) is the most popular stock in this table. On the other hand First Business Financial Services Inc (NASDAQ:FBIZ) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks SeaDrill Limited (NYSE:SDRL) is more popular among hedge funds. 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 SDRL wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on SDRL were disappointed as the stock returned -46.7% 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.