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Hedge Funds Were Dumping Canadian Natural Resources (CNQ) Even Before Coronavirus

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We have processed the filings of the more than 835 world-class investment firms that we track and now have access to the collective wisdom contained in these filings, which are based on their December 31 holdings, data that is available nowhere else. Should you consider Canadian Natural Resources Limited (NYSE:CNQ) for your portfolio? We’ll look to this invaluable collective wisdom for the answer.

Is Canadian Natural Resources Limited (NYSE:CNQ) a good investment now? The best stock pickers are in a bearish mood. The number of bullish hedge fund bets went down by 5 lately. Our calculations also showed that CNQ isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 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.

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 41 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.

George Soros of Soros Fund Management

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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind let’s check out the key hedge fund action encompassing Canadian Natural Resources Limited (NYSE:CNQ).

Hedge fund activity in Canadian Natural Resources Limited (NYSE:CNQ)

Heading into the first quarter of 2020, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CNQ over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

The largest stake in Canadian Natural Resources Limited (NYSE:CNQ) was held by GMT Capital, which reported holding $86.1 million worth of stock at the end of September. It was followed by Polar Capital with a $66.7 million position. Other investors bullish on the company included GLG Partners, Point72 Asset Management, and Alyeska Investment Group. In terms of the portfolio weights assigned to each position Elm Ridge Capital allocated the biggest weight to Canadian Natural Resources Limited (NYSE:CNQ), around 8.46% of its 13F portfolio. SIR Capital Management is also relatively very bullish on the stock, earmarking 3.96 percent of its 13F equity portfolio to CNQ.

Because Canadian Natural Resources Limited (NYSE:CNQ) has faced a decline in interest from the smart money, we can see that there lies a certain “tier” of fund managers that slashed their positions entirely heading into Q4. Intriguingly, Paul Marshall and Ian Wace’s Marshall Wace LLP dropped the largest stake of all the hedgies tracked by Insider Monkey, comprising an estimated $34.1 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund sold off about $24.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 5 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Canadian Natural Resources Limited (NYSE:CNQ) but similarly valued. We will take a look at Dell Technologies Inc. (NYSE:DELL), Delta Air Lines, Inc. (NYSE:DAL), Workday Inc (NASDAQ:WDAY), and Prudential Financial Inc (NYSE:PRU). This group of stocks’ market caps are closest to CNQ’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DELL 41 2361969 -6
DAL 70 7037405 -1
WDAY 55 2251111 11
PRU 36 691519 6
Average 50.5 3085501 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.5 hedge funds with bullish positions and the average amount invested in these stocks was $3086 million. That figure was $531 million in CNQ’s case. Delta Air Lines, Inc. (NYSE:DAL) is the most popular stock in this table. On the other hand Prudential Financial Inc (NYSE:PRU) is the least popular one with only 36 bullish hedge fund positions. Compared to these stocks Canadian Natural Resources Limited (NYSE:CNQ) is even less popular than PRU. Hedge funds dodged a bullet by taking a bearish stance towards CNQ. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but managed to beat the market by 3.1 percentage points. Unfortunately CNQ wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CNQ investors were disappointed as the stock returned -53.4% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in Q1.

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

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