Is FSM A Good Stock To Buy Now?

In this article we are going to use hedge fund sentiment as a tool and determine whether Fortuna Silver Mines Inc. (NYSE:FSM) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is FSM a good stock to buy now? Fortuna Silver Mines Inc. (NYSE:FSM) shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. Fortuna Silver Mines Inc. (NYSE:FSM) was in 13 hedge funds’ portfolios at the end of September. The all time high for this statistic is 15. There were 9 hedge funds in our database with FSM holdings at the end of June. Our calculations also showed that FSM isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 66 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.

Michael Hintze CQS Capital

Michael Hintze of CQS Cayman LP

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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. With all of this in mind we’re going to take a look at the latest hedge fund action surrounding Fortuna Silver Mines Inc. (NYSE:FSM).

Do Hedge Funds Think FSM Is A Good Stock To Buy Now?

At the end of September, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 44% from the second quarter of 2020. By comparison, 12 hedge funds held shares or bullish call options in FSM a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Fortuna Silver Mines Inc. (NYSE:FSM) was held by Sprott Asset Management, which reported holding $28.4 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $11.2 million position. Other investors bullish on the company included Millennium Management, CQS Cayman LP, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Sprott Asset Management allocated the biggest weight to Fortuna Silver Mines Inc. (NYSE:FSM), around 1.16% of its 13F portfolio. CQS Cayman LP is also relatively very bullish on the stock, earmarking 0.51 percent of its 13F equity portfolio to FSM.

With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. CQS Cayman LP, managed by Michael Hintze, assembled the biggest position in Fortuna Silver Mines Inc. (NYSE:FSM). CQS Cayman LP had $3.9 million invested in the company at the end of the quarter. D. E. Shaw’s D E Shaw also initiated a $1.2 million position during the quarter. The following funds were also among the new FSM investors: Mark Broach’s Manatuck Hill Partners, Fred Knoll’s Knoll Capital Management, and Donald Sussman’s Paloma Partners.

Let’s also examine hedge fund activity in other stocks similar to Fortuna Silver Mines Inc. (NYSE:FSM). We will take a look at NBT Bancorp Inc. (NASDAQ:NBTB), FB Financial Corporation (NYSE:FBK), Stewart Information Services Corp (NYSE:STC), Helios Technologies, Inc. (NASDAQ:HLIO), Intellia Therapeutics, Inc. (NASDAQ:NTLA), Sixth Street Specialty Lending Inc (NYSE:TSLX), and Bitauto Hldg Ltd (NYSE:BITA). This group of stocks’ market valuations match FSM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NBTB 8 10403 -1
FBK 9 49679 -3
STC 19 103657 4
HLIO 8 55418 -1
NTLA 15 62356 -2
TSLX 11 75906 1
BITA 16 158755 0
Average 12.3 73739 -0.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.3 hedge funds with bullish positions and the average amount invested in these stocks was $74 million. That figure was $54 million in FSM’s case. Stewart Information Services Corp (NYSE:STC) is the most popular stock in this table. On the other hand NBT Bancorp Inc. (NASDAQ:NBTB) is the least popular one with only 8 bullish hedge fund positions. Fortuna Silver Mines Inc. (NYSE:FSM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FSM is 57.7. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and beat the market again by 16.2 percentage points. Unfortunately FSM wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FSM were disappointed as the stock returned 7.5% since the end of September (through 12/8) 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.

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