Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like NL Industries, Inc. (NYSE:NL).
NL Industries, Inc. (NYSE:NL) was in 4 hedge funds’ portfolios at the end of September. NL has experienced an increase in hedge fund interest of late. There were 3 hedge funds in our database with NL positions at the end of the previous quarter. Our calculations also showed that NL 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.
Roger Ibbotson of Zebra Capital 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 as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s review the new hedge fund action encompassing NL Industries, Inc. (NYSE:NL).
Hedge fund activity in NL Industries, Inc. (NYSE:NL)
At the end of the third quarter, a total of 4 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NL over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Renaissance Technologies holds the largest position in NL Industries, Inc. (NYSE:NL). Renaissance Technologies has a $0.8 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is Millennium Management, managed by Israel Englander, which holds a $0.1 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish contain Roger Ibbotson’s Zebra Capital Management, Ken Griffin’s Citadel Investment Group and . In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to NL Industries, Inc. (NYSE:NL), around 0.05% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, dishing out 0.0007 percent of its 13F equity portfolio to NL.
Now, specific money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, created the most outsized position in NL Industries, Inc. (NYSE:NL). Millennium Management had $0.1 million invested in the company at the end of the quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as NL Industries, Inc. (NYSE:NL) but similarly valued. We will take a look at BankFinancial Corporation (NASDAQ:BFIN), IDEAYA Biosciences, Inc. (NASDAQ:IDYA), Zagg Inc (NASDAQ:ZAGG), and Clipper Realty Inc. (NYSE:CLPR). All of these stocks’ market caps are similar to NL’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BFIN | 5 | 14445 | 1 |
| IDYA | 9 | 32359 | 0 |
| ZAGG | 6 | 19642 | -5 |
| CLPR | 7 | 36891 | 0 |
| Average | 6.75 | 25834 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $1 million in NL’s case. IDEAYA Biosciences, Inc. (NASDAQ:IDYA) is the most popular stock in this table. On the other hand BankFinancial Corporation (NASDAQ:BFIN) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks NL Industries, Inc. (NYSE:NL) is even less popular than BFIN. Hedge funds clearly dropped the ball on NL as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 NL as the stock returned 12.8% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
