Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Archer Daniels Midland Company (NYSE:ADM).
Archer Daniels Midland Company (NYSE:ADM) investors should pay attention to an increase in enthusiasm from smart money in recent months. Our calculations also showed that ADM isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to 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 41 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.
Ric Dillon of Diamond Hill Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the recent hedge fund action surrounding Archer Daniels Midland Company (NYSE:ADM).
How are hedge funds trading Archer Daniels Midland Company (NYSE:ADM)?
At the end of the fourth quarter, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 22% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ADM over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Archer Daniels Midland Company (NYSE:ADM) was held by Diamond Hill Capital, which reported holding $191.8 million worth of stock at the end of September. It was followed by Levin Easterly Partners with a $104.8 million position. Other investors bullish on the company included Markel Gayner Asset Management, Citadel Investment Group, and Soros Fund Management. In terms of the portfolio weights assigned to each position Kehrs Ridge Capital allocated the biggest weight to Archer Daniels Midland Company (NYSE:ADM), around 3.6% of its 13F portfolio. Levin Easterly Partners is also relatively very bullish on the stock, designating 2.94 percent of its 13F equity portfolio to ADM.
Now, key hedge funds have jumped into Archer Daniels Midland Company (NYSE:ADM) headfirst. Moore Global Investments, managed by Louis Bacon, initiated the most valuable position in Archer Daniels Midland Company (NYSE:ADM). Moore Global Investments had $17.6 million invested in the company at the end of the quarter. Joel Greenblatt’s Gotham Asset Management also made a $15.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Brian Scudieri’s Kehrs Ridge Capital, Paul Marshall and Ian Wace’s Marshall Wace LLP, and David Costen Haley’s HBK Investments.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Archer Daniels Midland Company (NYSE:ADM) but similarly valued. We will take a look at Fortive Corporation (NYSE:FTV), Stanley Black & Decker, Inc. (NYSE:SWK), Pioneer Natural Resources Company (NYSE:PXD), and Microchip Technology Incorporated (NASDAQ:MCHP). This group of stocks’ market valuations are similar to ADM’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FTV | 43 | 1260211 | 7 |
| SWK | 41 | 1598834 | 13 |
| PXD | 53 | 1070714 | 3 |
| MCHP | 46 | 1428178 | 14 |
| Average | 45.75 | 1339484 | 9.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 45.75 hedge funds with bullish positions and the average amount invested in these stocks was $1339 million. That figure was $712 million in ADM’s case. Pioneer Natural Resources Company (NYSE:PXD) is the most popular stock in this table. On the other hand Stanley Black & Decker, Inc. (NYSE:SWK) is the least popular one with only 41 bullish hedge fund positions. Compared to these stocks Archer Daniels Midland Company (NYSE:ADM) is even less popular than SWK. Hedge funds dodged a bullet by taking a bearish stance towards ADM. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but managed to beat the market by 3.1 percentage points. Unfortunately ADM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ADM investors were disappointed as the stock returned -23.7% during the same time period 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 most of these stocks already outperformed the market so far in Q1.
Disclosure: None. This article was originally published at Insider Monkey.
