Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds’ top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
China Petroleum & Chemical Corp (NYSE:SNP) has seen an increase in enthusiasm from smart money of late. However, our calculations also showed that SNP isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). We will compare SNP against similarly valued peers such as Caterpillar Inc. (NYSE:CAT), Enbridge Inc (NYSE:ENB), Morgan Stanley (NYSE:MS), and Fiserv, Inc. (NASDAQ:FISV) to get an idea about what these numbers mean.
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’ 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.
Jim Simons of Renaissance Technologies
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 take a gander at the fresh hedge fund action surrounding China Petroleum & Chemical Corp (NYSE:SNP).
What have hedge funds been doing with China Petroleum & Chemical Corp (NYSE:SNP)?
At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in SNP over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Renaissance Technologies has the largest position in China Petroleum & Chemical Corp (NYSE:SNP), worth close to $122.6 million, amounting to 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $23.7 million position; 0.1% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism consist of John Overdeck and David Siegel’s Two Sigma Advisors, Israel Englander’s Millennium Management and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital. In terms of the portfolio weights assigned to each position Sensato Capital Management allocated the biggest weight to China Petroleum & Chemical Corp (NYSE:SNP), around 1.35% of its 13F portfolio. Springbok Capital is also relatively very bullish on the stock, designating 0.19 percent of its 13F equity portfolio to SNP.
With a general bullishness amongst the heavyweights, specific money managers have jumped into China Petroleum & Chemical Corp (NYSE:SNP) headfirst. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, assembled the biggest position in China Petroleum & Chemical Corp (NYSE:SNP). LMR Partners had $1.1 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also initiated a $0.8 million position during the quarter. The only other fund with a brand new SNP position is Donald Sussman’s Paloma Partners.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as China Petroleum & Chemical Corp (NYSE:SNP) but similarly valued. We will take a look at Caterpillar Inc. (NYSE:CAT), Enbridge Inc (NYSE:ENB), Morgan Stanley (NYSE:MS), and Fiserv, Inc. (NASDAQ:FISV). This group of stocks’ market valuations match SNP’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CAT | 37 | 2758115 | -8 |
| ENB | 18 | 515524 | -2 |
| MS | 61 | 4162955 | 1 |
| FISV | 73 | 3874672 | 25 |
| Average | 47.25 | 2827817 | 4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 47.25 hedge funds with bullish positions and the average amount invested in these stocks was $2828 million. That figure was $178 million in SNP’s case. Fiserv, Inc. (NASDAQ:FISV) is the most popular stock in this table. On the other hand Enbridge Inc (NYSE:ENB) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks China Petroleum & Chemical Corp (NYSE:SNP) is even less popular than ENB. Hedge funds dodged a bullet by taking a bearish stance towards SNP. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SNP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SNP investors were disappointed as the stock returned -4.9% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
