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Hedge Funds Keep Selling Diamondback Energy Inc (FANG)

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought Diamondback Energy Inc (NASDAQ:FANG) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.

Is Diamondback Energy Inc (NASDAQ:FANG) undervalued? Prominent investors were getting less bullish. The number of bullish hedge fund positions fell by 2 lately. Diamondback Energy Inc (NASDAQ:FANG) was in 29 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 47. Our calculations also showed that FANG 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Lee Ainslie MAVERICK CAPITAL

Lee Ainslie of Maverick Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind let’s take a look at the key hedge fund action regarding Diamondback Energy Inc (NASDAQ:FANG).

How have hedgies been trading Diamondback Energy Inc (NASDAQ:FANG)?

At the end of June, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards FANG over the last 20 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Among these funds, Adage Capital Management held the most valuable stake in Diamondback Energy Inc (NASDAQ:FANG), which was worth $17.9 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $13.3 million worth of shares. Maple Rock Capital, Carlson Capital, and Renaissance Technologies 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 Birch Run Capital allocated the biggest weight to Diamondback Energy Inc (NASDAQ:FANG), around 4.28% of its 13F portfolio. Maple Rock Capital is also relatively very bullish on the stock, earmarking 2.56 percent of its 13F equity portfolio to FANG.

Since Diamondback Energy Inc (NASDAQ:FANG) has faced falling interest from the aggregate hedge fund industry, we can see that there is a sect of funds that decided to sell off their entire stakes by the end of the second quarter. Intriguingly, Keith Meister’s Corvex Capital said goodbye to the biggest position of the “upper crust” of funds tracked by Insider Monkey, totaling close to $31.1 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dumped its stock, about $23.3 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 2 funds by the end of the second quarter.

Let’s also examine hedge fund activity in other stocks similar to Diamondback Energy Inc (NASDAQ:FANG). We will take a look at Carlisle Companies, Inc. (NYSE:CSL), The Boston Beer Company Inc (NYSE:SAM), Lear Corporation (NYSE:LEA), Bausch Health Companies Inc. (NYSE:BHC), Kingsoft Cloud Holdings Limited (NASDAQ:KC), Repligen Corporation (NASDAQ:RGEN), and GrubHub Inc (NYSE:GRUB). This group of stocks’ market valuations resemble FANG’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CSL 38 339108 15
SAM 32 804033 8
LEA 41 896134 13
BHC 35 1745572 0
KC 20 62450 20
RGEN 34 688852 13
GRUB 52 1080219 20
Average 36 802338 12.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 36 hedge funds with bullish positions and the average amount invested in these stocks was $802 million. That figure was $105 million in FANG’s case. GrubHub Inc (NYSE:GRUB) is the most popular stock in this table. On the other hand Kingsoft Cloud Holdings Limited (NASDAQ:KC) is the least popular one with only 20 bullish hedge fund positions. Diamondback Energy Inc (NASDAQ:FANG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for FANG is 35.6. 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 negative signal and 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 23.8% in 2020 through September 14th and surpassed the market by 17.6 percentage points. Unfortunately FANG wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); FANG investors were disappointed as the stock returned -25.1% since Q2 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 most of these stocks already outperformed the market in 2020.

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