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. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Rio Tinto plc (NYSE:RIO), so let’s take a closer look at the sentiment that surrounds it in the current quarter.
Is Rio Tinto plc (NYSE:RIO) a buy here? Prominent investors are reducing their bets on the stock. The number of bullish hedge fund positions retreated by 1 lately. Our calculations also showed that RIO isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). RIO was in 21 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 22 hedge funds in our database with RIO holdings at the end of the previous quarter.
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.
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. Keeping this in mind we’re going to review the key hedge fund action encompassing Rio Tinto plc (NYSE:RIO).
Hedge fund activity in Rio Tinto plc (NYSE:RIO)
At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the third quarter of 2019. By comparison, 23 hedge funds held shares or bullish call options in RIO a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Ken Fisher’s Fisher Asset Management has the biggest position in Rio Tinto plc (NYSE:RIO), worth close to $653.9 million, corresponding to 0.7% of its total 13F portfolio. The second largest stake is held by Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $631.8 million position; 1.5% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that are bullish contain Robert Bishop’s Impala Asset Management, Renaissance Technologies and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Impala Asset Management allocated the biggest weight to Rio Tinto plc (NYSE:RIO), around 8.78% of its 13F portfolio. Pittencrieff Partners – Gabalex Capital is also relatively very bullish on the stock, earmarking 5.83 percent of its 13F equity portfolio to RIO.
Due to the fact that Rio Tinto plc (NYSE:RIO) has faced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there exists a select few funds that elected to cut their entire stakes last quarter. Interestingly, Shane Finemore’s Manikay Partners cut the biggest stake of the “upper crust” of funds monitored by Insider Monkey, comprising about $5.2 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund dropped about $3.2 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds last quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Rio Tinto plc (NYSE:RIO) but similarly valued. These stocks are General Electric Company (NYSE:GE), British American Tobacco plc (NYSE:BTI), CVS Caremark Corporation (NYSE:CVS), and Altria Group Inc (NYSE:MO). This group of stocks’ market caps resemble RIO’s market cap.
|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 45.25 hedge funds with bullish positions and the average amount invested in these stocks was $2384 million. That figure was $1681 million in RIO’s case. General Electric Company (NYSE:GE) is the most popular stock in this table. On the other hand British American Tobacco plc (NYSE:BTI) is the least popular one with only 9 bullish hedge fund positions. Rio Tinto plc (NYSE:RIO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds 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 beat the market by 3.1 percentage points. Unfortunately RIO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); RIO investors were disappointed as the stock returned -24.5% 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 in Q1.
Disclosure: None. This article was originally published at Insider Monkey.