Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like MRC Global Inc (NYSE:MRC).
MRC Global Inc (NYSE:MRC) has experienced a decrease in hedge fund interest of late. Our calculations also showed that MRC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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’ 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.
Jonathan Barrett of Luminus Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s go over the fresh hedge fund action regarding MRC Global Inc (NYSE:MRC).
What does smart money think about MRC Global Inc (NYSE:MRC)?
Heading into the fourth quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MRC over the last 17 quarters. With hedgies’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, Luminus Management was the largest shareholder of MRC Global Inc (NYSE:MRC), with a stake worth $32.9 million reported as of the end of September. Trailing Luminus Management was D E Shaw, which amassed a stake valued at $14.5 million. Impax Asset Management, Renaissance Technologies, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position BP Capital allocated the biggest weight to MRC Global Inc (NYSE:MRC), around 1.06% of its 13F portfolio. Luminus Management is also relatively very bullish on the stock, dishing out 0.95 percent of its 13F equity portfolio to MRC.
Because MRC Global Inc (NYSE:MRC) has faced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of funds who were dropping their positions entirely in the third quarter. Interestingly, Dmitry Balyasny’s Balyasny Asset Management sold off the biggest stake of the “upper crust” of funds followed by Insider Monkey, worth an estimated $7.2 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund said goodbye to about $4.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 3 funds in the third quarter.
Let’s now review hedge fund activity in other stocks similar to MRC Global Inc (NYSE:MRC). We will take a look at The Buckle, Inc. (NYSE:BKE), Orthofix Medical Inc. (NASDAQ:OFIX), Tenneco Inc (NYSE:TEN), and Brigham Minerals, Inc. (NYSE:MNRL). All of these stocks’ market caps match MRC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BKE | 12 | 43909 | -2 |
| OFIX | 13 | 69122 | 0 |
| TEN | 13 | 130095 | 1 |
| MNRL | 14 | 75671 | -1 |
| Average | 13 | 79699 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $73 million in MRC’s case. Brigham Minerals, Inc. (NYSE:MNRL) is the most popular stock in this table. On the other hand The Buckle, Inc. (NYSE:BKE) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks MRC Global Inc (NYSE:MRC) is even less popular than BKE. 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. A small number of hedge funds were also right about betting on MRC, though not to the same extent, as the stock returned 10% during the fourth quarter (through 11/30) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
