Orion Engineered Carbons SA (OEC): Hedge Funds In Wait-and-See Mode

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Orion Engineered Carbons SA (NYSE:OEC) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Hedge fund interest in Orion Engineered Carbons SA (NYSE:OEC) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that OEC 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 ConnectOne Bancorp Inc (NASDAQ:CNOB), Sinovac Biotech Ltd. (NASDAQ:SVA), and Preferred Bank (NASDAQ:PFBC) to gather more data points. Our calculations also showed that OEC 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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 look at the new hedge fund action encompassing Orion Engineered Carbons SA (NYSE:OEC).

Hedge fund activity in Orion Engineered Carbons SA (NYSE:OEC)

At the end of the second quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 17 hedge funds with a bullish position in OEC 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.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, holds the number one position in Orion Engineered Carbons SA (NYSE:OEC). Renaissance Technologies has a $37.1 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second largest stake is held by Robert Rodriguez and Steven Romick of First Pacific Advisors LLC, with a $18 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish include Richard S. Pzena’s Pzena Investment Management, Tony Davis’s Inherent Group and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Inherent Group allocated the biggest weight to Orion Engineered Carbons SA (NYSE:OEC), around 13.5% of its 13F portfolio. Harvey Partners is also relatively very bullish on the stock, earmarking 2.11 percent of its 13F equity portfolio to OEC.

Because Orion Engineered Carbons SA (NYSE:OEC) has experienced declining sentiment from the smart money, we can see that there lies a certain “tier” of hedgies that elected to cut their positions entirely in the second quarter. Interestingly, Jonathan Barrett and Paul Segal’s Luminus Management cut the largest investment of the “upper crust” of funds monitored by Insider Monkey, worth close to $7.3 million in stock. Alexander Mitchell’s fund, Scopus Asset Management, also dropped its stock, about $2.2 million worth. These bearish behaviors 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 Orion Engineered Carbons SA (NYSE:OEC) but similarly valued. These stocks are ConnectOne Bancorp Inc (NASDAQ:CNOB), Sinovac Biotech Ltd. (NASDAQ:SVA), Preferred Bank (NASDAQ:PFBC), Neoleukin Therapeutics, Inc. (NASDAQ:NLTX), G-III Apparel Group, Ltd. (NASDAQ:GIII), OneSmart International Education Group Limited (NYSE:ONE), and Century Aluminum Co (NASDAQ:CENX). This group of stocks’ market valuations are closest to OEC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CNOB 11 34533 0
SVA 3 65210 0
PFBC 9 32243 2
NLTX 19 254003 -1
GIII 10 39497 -7
ONE 6 52707 -1
CENX 12 30570 0
Average 10 72680 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $73 million. That figure was $123 million in OEC’s case. Neoleukin Therapeutics, Inc. (NASDAQ:NLTX) is the most popular stock in this table. On the other hand Sinovac Biotech Ltd. (NASDAQ:SVA) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Orion Engineered Carbons SA (NYSE:OEC) is more popular among hedge funds. Our overall hedge fund sentiment score for OEC is 77.5. 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. 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 returned 24.8% in 2020 through the end of September but still managed to beat the market by 19.3 percentage points. Hedge funds were also right about betting on OEC as the stock returned 18.1% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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