Should You Buy Rio Tinto plc (RIO)?

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 30 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 15.1% over the last 12 months (vs. 5.6% gain for SPY), with 53% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Rio Tinto plc (NYSE:RIO).

Hedge fund interest in Rio Tinto plc (NYSE:RIO) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Diageo plc (NYSE:DEO), U.S. Bancorp (NYSE:USB), and HDFC Bank Limited (NYSE:HDB) to gather more data points.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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 24% through December 3, 2018. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.


Let’s take a look at the latest hedge fund action regarding Rio Tinto plc (NYSE:RIO).

How are hedge funds trading Rio Tinto plc (NYSE:RIO)?

At the end of the third quarter, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, representing no change from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards RIO over the last 13 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with RIO Positions

Among these funds, Fisher Asset Management held the most valuable stake in Rio Tinto plc (NYSE:RIO), which was worth $473.2 million at the end of the third quarter. On the second spot was Impala Asset Management which amassed $173.2 million worth of shares. Moreover, Arrowstreet Capital, Two Sigma Advisors, and Point72 Asset Management were also bullish on Rio Tinto plc (NYSE:RIO), allocating a large percentage of their portfolios to this stock.

Since Rio Tinto plc (NYSE:RIO) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there is a sect of fund managers who sold off their positions entirely heading into Q3. At the top of the heap, Ken Heebner’s Capital Growth Management sold off the biggest investment of all the hedgies tracked by Insider Monkey, valued at about $19.4 million in stock. Christopher A. Winham’s fund, Tide Point Capital, also sold off its stock, about $14.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Rio Tinto plc (NYSE:RIO). We will take a look at Diageo plc (NYSE:DEO), U.S. Bancorp (NYSE:USB), HDFC Bank Limited (NYSE:HDB), and Twenty-First Century Fox Inc (NASDAQ:FOX). All of these stocks’ market caps match RIO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DEO 15 965351 0
USB 39 7393172 9
HDB 27 990230 3
FOX 49 5335990 6
Average 32.5 3671186 4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $3.67 million. That figure was $945 million in RIO’s case. Twenty-First Century Fox Inc (NASDAQ:FOX) is the most popular stock in this table. On the other hand Diageo plc (NYSE:DEO) is the least popular one with only 15 bullish hedge fund positions. Rio Tinto plc (NYSE:RIO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard FOX might be a better candidate to consider a long position.

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