It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 15 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 19.7% during the first 2.5 months of 2019 (vs. 13.1% gain for SPY), with 93% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Reliance Steel & Aluminum Co. (NYSE:RS).
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 flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
We’re going to take a look at the key hedge fund action surrounding Reliance Steel & Aluminum Co. (NYSE:RS).
What have hedge funds been doing with Reliance Steel & Aluminum Co. (NYSE:RS)?
At the end of the fourth quarter, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in RS a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Jonathan Barrett and Paul Segal’s Luminus Management has the number one position in Reliance Steel & Aluminum Co. (NYSE:RS), worth close to $90.3 million, corresponding to 1.8% of its total 13F portfolio. Sitting at the No. 2 spot is Royce & Associates, led by Chuck Royce, holding a $63.9 million position; the fund has 0.6% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish contain Cliff Asness’s AQR Capital Management, Israel Englander’s Millennium Management and Jim Simons’s Renaissance Technologies.
Due to the fact that Reliance Steel & Aluminum Co. (NYSE:RS) has experienced falling interest from hedge fund managers, it’s safe to say that there was a specific group of funds that slashed their entire stakes last quarter. Interestingly, Jorge Paulo Lemann’s 3G Capital dumped the biggest investment of the 700 funds followed by Insider Monkey, comprising about $12.8 million in stock, and Thomas Bailard’s Bailard Inc was right behind this move, as the fund said goodbye to about $3 million worth. These moves are important to note, as total hedge fund interest dropped by 7 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Reliance Steel & Aluminum Co. (NYSE:RS). These stocks are First American Financial Corp (NYSE:FAF), Planet Fitness Inc (NYSE:PLNT), ServiceMaster Global Holdings Inc (NYSE:SERV), and Carvana Co. (NYSE:CVNA). This group of stocks’ market values are similar to RS’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $551 million. That figure was $266 million in RS’s case. Carvana Co. (NYSE:CVNA) is the most popular stock in this table. On the other hand ServiceMaster Global Holdings Inc (NYSE:SERV) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Reliance Steel & Aluminum Co. (NYSE:RS) is even less popular than SERV. Hedge funds clearly dropped the ball on RS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on RS as the stock returned 25.8% and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.