Is Beacon Roofing Supply, Inc. (BECN) Going To Burn These Hedge Funds ?

Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Beacon Roofing Supply, Inc. (NASDAQ:BECN).

Beacon Roofing Supply, Inc. (NASDAQ:BECN) has experienced an increase in hedge fund sentiment in recent months. Our calculations also showed that BECN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Phill Gross of Adage Capital Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to go over the new hedge fund action encompassing Beacon Roofing Supply, Inc. (NASDAQ:BECN).

What does smart money think about Beacon Roofing Supply, Inc. (NASDAQ:BECN)?

At the end of the third quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 31% from the previous quarter. By comparison, 21 hedge funds held shares or bullish call options in BECN a year ago. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

The largest stake in Beacon Roofing Supply, Inc. (NASDAQ:BECN) was held by Iridian Asset Management, which reported holding $114.6 million worth of stock at the end of September. It was followed by Adage Capital Management with a $94.6 million position. Other investors bullish on the company included Fisher Asset Management, Soapstone Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Soapstone Capital allocated the biggest weight to Beacon Roofing Supply, Inc. (NASDAQ:BECN), around 9.77% of its 13F portfolio. Spitfire Capital is also relatively very bullish on the stock, earmarking 2.38 percent of its 13F equity portfolio to BECN.

As one would reasonably expect, key hedge funds were leading the bulls’ herd. Hudson Bay Capital Management, managed by Sander Gerber, established the largest position in Beacon Roofing Supply, Inc. (NASDAQ:BECN). Hudson Bay Capital Management had $1.3 million invested in the company at the end of the quarter. Jon Bauer’s Contrarian Capital also initiated a $0.5 million position during the quarter. The following funds were also among the new BECN investors: Michael Gelband’s ExodusPoint Capital, Israel Englander’s Millennium Management, and Hoon Kim’s Quantinno Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Beacon Roofing Supply, Inc. (NASDAQ:BECN) but similarly valued. We will take a look at Natera Inc (NASDAQ:NTRA), Seaspan Corporation (NYSE:SSW), ExlService Holdings, Inc. (NASDAQ:EXLS), and Tenet Healthcare Corporation (NYSE:THC). This group of stocks’ market caps match BECN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NTRA 22 270162 2
SSW 12 855040 5
EXLS 14 48976 3
THC 25 742996 -5
Average 18.25 479294 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $479 million. That figure was $331 million in BECN’s case. Tenet Healthcare Corporation (NYSE:THC) is the most popular stock in this table. On the other hand Seaspan Corporation (NYSE:SSW) is the least popular one with only 12 bullish hedge fund positions. Beacon Roofing Supply, Inc. (NASDAQ:BECN) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately BECN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on BECN were disappointed as the stock returned -11.6% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.

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