Hedge Funds Aren’t Crazy About SeaDrill Limited (SDRL)

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards SeaDrill Limited (NYSE:SDRL) and determine whether hedge funds skillfully traded this stock.

SeaDrill Limited (NYSE:SDRL) was in 10 hedge funds’ portfolios at the end of the first quarter of 2020. SDRL has experienced a decrease in enthusiasm from smart money of late. There were 12 hedge funds in our database with SDRL positions 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 Q1 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.

In today’s marketplace there are tons of metrics market participants use to grade stocks. A couple of the most under-the-radar metrics are hedge fund and insider trading signals. Our researchers have shown that, historically, those who follow the best picks of the top fund managers can trounce the broader indices by a solid margin (see the details here).

Crispin Odey of Odey Asset Management Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s view the new hedge fund action regarding SeaDrill Limited (NYSE:SDRL).

Hedge fund activity in SeaDrill Limited (NYSE:SDRL)

At Q1’s end, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SDRL over the last 18 quarters. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Brian J. Higgins’s King Street Capital has the most valuable position in SeaDrill Limited (NYSE:SDRL), worth close to $2.9 million, corresponding to 0.3% of its total 13F portfolio. The second most bullish fund manager is Stephen Mildenhall of Contrarius Investment Management, with a $2 million position; 0.3% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors with similar optimism comprise Crispin Odey’s Odey Asset Management Group, Himanshu H. Shah’s Shah Capital Management and Paul Marshall and Ian Wace’s Marshall Wace LLP. In terms of the portfolio weights assigned to each position Shah Capital Management allocated the biggest weight to SeaDrill Limited (NYSE:SDRL), around 0.9% of its 13F portfolio. King Street Capital is also relatively very bullish on the stock, dishing out 0.32 percent of its 13F equity portfolio to SDRL.

Because SeaDrill Limited (NYSE:SDRL) has witnessed declining sentiment from the aggregate hedge fund industry, it’s easy to see that there is a sect of hedgies that slashed their full holdings in the first quarter. Interestingly, Ari Zweiman’s 683 Capital Partners sold off the largest position of the “upper crust” of funds followed by Insider Monkey, totaling about $1.3 million in stock. Phil Frohlich’s fund, Prescott Group Capital Management, also sold off its stock, about $0.4 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 2 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to SeaDrill Limited (NYSE:SDRL). We will take a look at Contura Energy, Inc. (NYSE:CTRA), Baudax Bio, Inc. (NASDAQ:BXRX), Mediwound Ltd (NASDAQ:MDWD), and NanoViricides Inc (NYSE:NNVC). This group of stocks’ market valuations resemble SDRL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CTRA 16 14591 -3
BXRX 11 10267 1
MDWD 1 730 -1
NNVC 2 409 1
Average 7.5 6499 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $9 million in SDRL’s case. Contura Energy, Inc. (NYSE:CTRA) is the most popular stock in this table. On the other hand Mediwound Ltd (NASDAQ:MDWD) is the least popular one with only 1 bullish hedge fund positions. SeaDrill Limited (NYSE:SDRL) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately SDRL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SDRL were disappointed as the stock returned 0% 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.

Follow Seadrill Ltd (NYSE:SDRL)

Disclosure: None. This article was originally published at Insider Monkey.