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Should You Avoid Cleveland-Cliffs Inc (CLF)?

In this article we will take a look at whether hedge funds think Cleveland-Cliffs Inc (NYSE:CLF) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Cleveland-Cliffs Inc (NYSE:CLF) was in 23 hedge funds’ portfolios at the end of March. CLF has experienced a decrease in enthusiasm from smart money recently. There were 31 hedge funds in our database with CLF positions at the end of the previous quarter. Our calculations also showed that CLF isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 58 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.

Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the latest hedge fund action encompassing Cleveland-Cliffs Inc (NYSE:CLF).

What have hedge funds been doing with Cleveland-Cliffs Inc (NYSE:CLF)?

At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in CLF over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Fisher Asset Management held the most valuable stake in Cleveland-Cliffs Inc (NYSE:CLF), which was worth $36.1 million at the end of the third quarter. On the second spot was D E Shaw which amassed $10.4 million worth of shares. Masters Capital Management, Citadel Investment Group, and Royce & Associates 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 Masters Capital Management allocated the biggest weight to Cleveland-Cliffs Inc (NYSE:CLF), around 0.92% of its 13F portfolio. Aequim Alternative Investments is also relatively very bullish on the stock, setting aside 0.88 percent of its 13F equity portfolio to CLF.

Due to the fact that Cleveland-Cliffs Inc (NYSE:CLF) has experienced falling interest from hedge fund managers, logic holds that there is a sect of funds who sold off their positions entirely heading into Q4. It’s worth mentioning that Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners cut the largest stake of the 750 funds watched by Insider Monkey, totaling about $31.9 million in stock. Todd J. Kantor’s fund, Encompass Capital Advisors, also cut its stock, about $12.4 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 8 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Cleveland-Cliffs Inc (NYSE:CLF) but similarly valued. We will take a look at ServisFirst Bancshares, Inc. (NASDAQ:SFBS), Phoenix Tree Holdings Limited (NYSE:DNK), National Vision Holdings, Inc. (NASDAQ:EYE), and LexinFintech Holdings Ltd. (NASDAQ:LX). This group of stocks’ market caps are similar to CLF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SFBS 10 10012 1
DNK 3 21532 3
EYE 14 199114 -1
LX 17 39778 4
Average 11 67609 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $68 million. That figure was $77 million in CLF’s case. LexinFintech Holdings Ltd. (NASDAQ:LX) is the most popular stock in this table. On the other hand Phoenix Tree Holdings Limited (NYSE:DNK) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Cleveland-Cliffs Inc (NYSE:CLF) is more popular among hedge funds. 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 13.9% in 2020 through June 10th but still managed to beat the market by 14.2 percentage points. Hedge funds were also right about betting on CLF as the stock returned 69.5% so far in Q2 (through June 10th) 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.