The elite funds run by legendary investors such as David Tepper and Dan Loeb make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don’t follow. Because of their pay structures, they have strong incentives to do the research necessary to beat the market. That’s why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at Sociedad Química y Minera de Chile S.A. (NYSE:SQM) from the perspective of those elite funds.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.
We’re going to analyze the latest hedge fund action encompassing Sociedad Química y Minera de Chile S.A. (NYSE:SQM).
What does the smart money think about Sociedad Química y Minera de Chile S.A. (NYSE:SQM)?
At the end of the fourth quarter, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SQM over the last 14 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
More specifically, Marshall Wace LLP was the largest shareholder of Sociedad Química y Minera de Chile S.A. (NYSE:SQM), with a stake worth $27.8 million reported as of the end of September. Trailing Marshall Wace LLP was Two Sigma Advisors, which amassed a stake valued at $17 million. Renaissance Technologies, AQR Capital Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Because Sociedad Química y Minera de Chile S.A. (NYSE:SQM) has faced bearish sentiment from hedge fund managers, logic holds that there were a few hedge funds that elected to cut their entire stakes last quarter. Interestingly, Ken Griffin’s Citadel Investment Group cut the biggest position of the 700 funds followed by Insider Monkey, valued at about $1.1 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund said goodbye to about $0.6 million worth. These transactions are important to note, as total hedge fund interest fell by 1 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to Sociedad Química y Minera de Chile S.A. (NYSE:SQM). We will take a look at CF Industries Holdings, Inc. (NYSE:CF), Apollo Global Management LLC (NYSE:APO), Tableau Software Inc (NYSE:DATA), and Alliant Energy Corporation (NASDAQ:LNT). This group of stocks’ market caps are similar to SQM’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 32 hedge funds with bullish positions and the average amount invested in these stocks was $1256 million. That figure was $56 million in SQM’s case. CF Industries Holdings, Inc. (NYSE:CF) is the most popular stock in this table. On the other hand Apollo Global Management LLC (NYSE:APO) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Sociedad Química y Minera de Chile S.A. (NYSE:SQM) is even less popular than APO. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately SQM wasn’t in this group. Hedge funds that bet on SQM were disappointed as the stock returned .9% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.