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Hedge Funds Were Getting Burned By Flowserve Corporation (FLS) Before The 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 (10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. At Insider Monkey, we pore over the filings of nearly 835 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of December 31. In this article, we will use that wealth of knowledge to determine whether or not Flowserve Corporation (NYSE:FLS) makes for a good investment right now.

Flowserve Corporation (NYSE:FLS) has seen an increase in activity from the world’s largest hedge funds in recent months. FLS was in 26 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 22 hedge funds in our database with FLS holdings at the end of the previous quarter. Our calculations also showed that FLS isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 S&P 500 ETFs by 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.

Mario Gabelli

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a gander at the key hedge fund action encompassing Flowserve Corporation (NYSE:FLS).

How have hedgies been trading Flowserve Corporation (NYSE:FLS)?

Heading into the first quarter of 2020, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards FLS over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is FLS A Good Stock To Buy?

Among these funds, GAMCO Investors held the most valuable stake in Flowserve Corporation (NYSE:FLS), which was worth $113.8 million at the end of the third quarter. On the second spot was Impax Asset Management which amassed $81.2 million worth of shares. Millennium Management, Adage Capital Management, and Citadel Investment Group 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 GAMCO Investors allocated the biggest weight to Flowserve Corporation (NYSE:FLS), around 0.91% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, earmarking 0.91 percent of its 13F equity portfolio to FLS.

With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Millennium Management, managed by Israel Englander, assembled the largest position in Flowserve Corporation (NYSE:FLS). Millennium Management had $19.2 million invested in the company at the end of the quarter. Noam Gottesman’s GLG Partners also initiated a $4.9 million position during the quarter. The other funds with brand new FLS positions are Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, Philippe Laffont’s Coatue Management, and Michael Gelband’s ExodusPoint Capital.

Let’s now take a look at hedge fund activity in other stocks similar to Flowserve Corporation (NYSE:FLS). We will take a look at Alteryx, Inc. (NYSE:AYX), Mellanox Technologies, Ltd. (NASDAQ:MLNX), ITT Corp (NYSE:ITT), and Proofpoint Inc (NASDAQ:PFPT). This group of stocks’ market caps are closest to FLS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AYX 44 961060 0
MLNX 39 1468992 -3
ITT 28 756797 3
PFPT 35 395274 -10
Average 36.5 895531 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.5 hedge funds with bullish positions and the average amount invested in these stocks was $896 million. That figure was $287 million in FLS’s case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand ITT Corp (NYSE:ITT) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Flowserve Corporation (NYSE:FLS) is even less popular than ITT. Hedge funds dodged a bullet by taking a bearish stance towards FLS. 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 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. Unfortunately FLS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); FLS investors were disappointed as the stock returned -54.8% 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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