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Were Hedge Funds Right About Devon Energy Corporation (DVN)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Devon Energy Corporation (NYSE:DVN) and determine whether hedge funds had an edge regarding this stock.

Devon Energy Corporation (NYSE:DVN) was in 42 hedge funds’ portfolios at the end of the first quarter of 2020. DVN has experienced a decrease in activity from the world’s largest hedge funds lately. There were 54 hedge funds in our database with DVN holdings at the end of the previous quarter. Our calculations also showed that DVN 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Jonathan Barrett Luminus Management

Jonathan Barrett of Luminus Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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. Now let’s take a look at the fresh hedge fund action encompassing Devon Energy Corporation (NYSE:DVN).

Hedge fund activity in Devon Energy Corporation (NYSE:DVN)

At the end of the first quarter, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DVN 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.

The largest stake in Devon Energy Corporation (NYSE:DVN) was held by Holocene Advisors, which reported holding $36.4 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $31.9 million position. Other investors bullish on the company included D E Shaw, SIR Capital Management, and Fisher Asset Management. In terms of the portfolio weights assigned to each position SIR Capital Management allocated the biggest weight to Devon Energy Corporation (NYSE:DVN), around 9.1% of its 13F portfolio. Rutabaga Capital Management is also relatively very bullish on the stock, designating 1.03 percent of its 13F equity portfolio to DVN.

Because Devon Energy Corporation (NYSE:DVN) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of fund managers who were dropping their full holdings in the first quarter. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management sold off the biggest position of the 750 funds monitored by Insider Monkey, comprising about $40.7 million in stock, and Ric Dillon’s Diamond Hill Capital was right behind this move, as the fund cut about $30.4 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 12 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Devon Energy Corporation (NYSE:DVN). We will take a look at Nexstar Media Group, Inc. (NASDAQ:NXST), Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI), Medpace Holdings, Inc. (NASDAQ:MEDP), and Ultrapar Participacoes SA (NYSE:UGP). This group of stocks’ market valuations resemble DVN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NXST 41 662726 1
SHI 3 11620 0
MEDP 17 183270 0
UGP 5 25895 0
Average 16.5 220878 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $221 million. That figure was $223 million in DVN’s case. Nexstar Media Group, Inc. (NASDAQ:NXST) is the most popular stock in this table. On the other hand Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Devon Energy Corporation (NYSE:DVN) 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on DVN as the stock returned 65.6% in Q2 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.