How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Transocean Ltd (NYSE:RIG) and determine whether hedge funds had an edge regarding this stock.
Hedge fund interest in Transocean Ltd (NYSE:RIG) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that RIG isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as HeadHunter Group PLC (NASDAQ:HHR), Genworth Financial Inc (NYSE:GNW), and Safety Insurance Group, Inc. (NASDAQ:SAFT) to gather more data points. Our calculations also showed that RIG isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We are also checking out this lithium company which could benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s take a gander at the fresh hedge fund action surrounding Transocean Ltd (NYSE:RIG).
How are hedge funds trading Transocean Ltd (NYSE:RIG)?
Heading into the third quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2020. On the other hand, there were a total of 31 hedge funds with a bullish position in RIG a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
The largest stake in Transocean Ltd (NYSE:RIG) was held by Avenue Capital, which reported holding $13.9 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $10.4 million position. Other investors bullish on the company included Masters Capital Management, Tensile Capital, and D E Shaw. In terms of the portfolio weights assigned to each position Avenue Capital allocated the biggest weight to Transocean Ltd (NYSE:RIG), around 9.15% of its 13F portfolio. Valueworks LLC is also relatively very bullish on the stock, setting aside 1.47 percent of its 13F equity portfolio to RIG.
Seeing as Transocean Ltd (NYSE:RIG) has witnessed a decline in interest from the smart money, it’s safe to say that there were a few money managers who sold off their positions entirely last quarter. It’s worth mentioning that Stephen Mildenhall’s Contrarius Investment Management sold off the biggest position of all the hedgies tracked by Insider Monkey, worth about $49.6 million in stock. Kerr Neilson’s fund, Platinum Asset Management, also dumped its stock, about $18.1 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Transocean Ltd (NYSE:RIG) but similarly valued. These stocks are HeadHunter Group PLC (NASDAQ:HHR), Genworth Financial Inc (NYSE:GNW), Safety Insurance Group, Inc. (NASDAQ:SAFT), Victory Capital Holdings, Inc. (NASDAQ:VCTR), Service Properties Trust (NASDAQ:SVC), Domtar Corporation (NYSE:UFS), and Kaiser Aluminum Corp. (NASDAQ:KALU). This group of stocks’ market caps are similar to RIG’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 18.1 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $60 million in RIG’s case. Genworth Financial Inc (NYSE:GNW) is the most popular stock in this table. On the other hand HeadHunter Group PLC (NASDAQ:HHR) is the least popular one with only 5 bullish hedge fund positions. Transocean Ltd (NYSE:RIG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for RIG is 45.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately RIG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RIG were disappointed as the stock returned -55.7% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Follow Transocean Ltd. (NYSE:RIG)
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Disclosure: None. This article was originally published at Insider Monkey.