Hedge Funds Never Been Less Bullish On Ternium S.A. (TX)

In this article we will take a look at whether hedge funds think Ternium S.A. (NYSE:TX) is 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.

Ternium S.A. (NYSE:TX) investors should pay attention to a decrease in activity from the world’s largest hedge funds recently. TX was in 8 hedge funds’ portfolios at the end of the first quarter of 2020. There were 11 hedge funds in our database with TX holdings at the end of the previous quarter. Our calculations also showed that TX 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.

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 58 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.

Gifford Combs - Dalton Investments

Gifford Combs of Dalton Investments

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. Keeping this in mind we’re going to take a look at the latest hedge fund action encompassing Ternium S.A. (NYSE:TX).

What does smart money think about Ternium S.A. (NYSE:TX)?

At Q1’s end, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of -27% from the fourth quarter of 2019. By comparison, 12 hedge funds held shares or bullish call options in TX a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Oldfield Partners held the most valuable stake in Ternium S.A. (NYSE:TX), which was worth $34.8 million at the end of the third quarter. On the second spot was Contrarian Capital which amassed $15.9 million worth of shares. Arrowstreet Capital, Citadel Investment Group, and Dalton Investments 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 Contrarian Capital allocated the biggest weight to Ternium S.A. (NYSE:TX), around 8.34% of its 13F portfolio. Oldfield Partners is also relatively very bullish on the stock, setting aside 4.41 percent of its 13F equity portfolio to TX.

Because Ternium S.A. (NYSE:TX) has witnessed a decline in interest from the smart money, we can see that there were a few hedge funds that slashed their positions entirely heading into Q4. Interestingly, Israel Englander’s Millennium Management cut the largest investment of the 750 funds tracked by Insider Monkey, comprising close to $2.4 million in stock. Louis Bacon’s fund, Moore Global Investments, also dropped its stock, about $1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 3 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Ternium S.A. (NYSE:TX) but similarly valued. These stocks are Colfax Corporation (NYSE:CFX), United Bankshares, Inc. (NASDAQ:UBSI), Taro Pharmaceutical Industries Ltd. (NYSE:TARO), and Natera Inc (NASDAQ:NTRA). This group of stocks’ market valuations are similar to TX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CFX 32 421377 -11
UBSI 13 46714 -5
TARO 9 64708 -3
NTRA 32 392988 -1
Average 21.5 231447 -5

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $231 million. That figure was $62 million in TX’s case. Colfax Corporation (NYSE:CFX) is the most popular stock in this table. On the other hand Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Ternium S.A. (NYSE:TX) is even less popular than TARO. Hedge funds clearly dropped the ball on TX as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 12.2% in 2020 through June 17th and still beat the market by 14.8 percentage points. A small number of hedge funds were also right about betting on TX as the stock returned 49.1% so far in the second quarter and outperformed the market by an even larger margin.

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