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Were Hedge Funds Right About Buying EOG Resources Inc (EOG)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards EOG Resources Inc (NYSE:EOG) and determine whether hedge funds skillfully traded this stock.

EOG Resources Inc (NYSE:EOG) was in 44 hedge funds’ portfolios at the end of March. EOG shareholders have witnessed an increase in enthusiasm from smart money lately. There were 43 hedge funds in our database with EOG holdings at the end of the previous quarter. Our calculations also showed that EOG 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.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a glance at the key hedge fund action surrounding EOG Resources Inc (NYSE:EOG).

How have hedgies been trading EOG Resources Inc (NYSE:EOG)?

At Q1’s end, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 2% from the fourth quarter of 2019. By comparison, 39 hedge funds held shares or bullish call options in EOG a year ago. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Among these funds, Two Sigma Advisors held the most valuable stake in EOG Resources Inc (NYSE:EOG), which was worth $112.9 million at the end of the third quarter. On the second spot was D E Shaw which amassed $111.9 million worth of shares. Citadel Investment Group, Lyrical Asset Management, and Encompass Capital Advisors 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 Encompass Capital Advisors allocated the biggest weight to EOG Resources Inc (NYSE:EOG), around 7.42% of its 13F portfolio. Lyrical Asset Management is also relatively very bullish on the stock, designating 2.38 percent of its 13F equity portfolio to EOG.

As industrywide interest jumped, key hedge funds were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, initiated the largest position in EOG Resources Inc (NYSE:EOG). Citadel Investment Group had $96.9 million invested in the company at the end of the quarter. Todd J. Kantor’s Encompass Capital Advisors also made a $69.1 million investment in the stock during the quarter. The following funds were also among the new EOG investors: Dmitry Balyasny’s Balyasny Asset Management, Benjamin A. Smith’s Laurion Capital Management, and Greg Eisner’s Engineers Gate Manager.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as EOG Resources Inc (NYSE:EOG) but similarly valued. We will take a look at Zimmer Biomet Holdings Inc (NYSE:ZBH), IQVIA Holdings, Inc. (NYSE:IQV), ZTO Express (Cayman) Inc. (NYSE:ZTO), and AvalonBay Communities Inc (NYSE:AVB). All of these stocks’ market caps match EOG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ZBH 51 621129 -13
IQV 60 2473750 -4
ZTO 15 562997 1
AVB 30 377394 7
Average 39 1008818 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $1009 million. That figure was $801 million in EOG’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand ZTO Express (Cayman) Inc. (NYSE:ZTO) is the least popular one with only 15 bullish hedge fund positions. EOG Resources Inc (NYSE:EOG) is not the most popular stock in this group but hedge fund interest is still above average. 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 gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on EOG as the stock returned 42.3% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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