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Were Hedge Funds Right About Dumping Ecopetrol S.A. (EC)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Ecopetrol S.A. (NYSE:EC)? The smart money sentiment can provide an answer to this question.

Ecopetrol S.A. (NYSE:EC) has experienced a decrease in hedge fund sentiment of late. Our calculations also showed that EC isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

EC_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a look at the new hedge fund action encompassing Ecopetrol S.A. (NYSE:EC).

What have hedge funds been doing with Ecopetrol S.A. (NYSE:EC)?

At the end of the second quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards EC over the last 16 quarters. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

Among these funds, Renaissance Technologies held the most valuable stake in Ecopetrol S.A. (NYSE:EC), which was worth $122.7 million at the end of the second quarter. On the second spot was Fisher Asset Management which amassed $42.9 million worth of shares. Moreover, Point72 Asset Management, Millennium Management, and D E Shaw were also bullish on Ecopetrol S.A. (NYSE:EC), allocating a large percentage of their portfolios to this stock.

Because Ecopetrol S.A. (NYSE:EC) has witnessed bearish sentiment from the smart money, logic holds that there were a few fund managers that slashed their entire stakes heading into Q3. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the biggest stake of the “upper crust” of funds followed by Insider Monkey, comprising about $11.5 million in stock, and Guy Shahar’s DSAM Partners was right behind this move, as the fund said goodbye to about $5.9 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 5 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Ecopetrol S.A. (NYSE:EC) but similarly valued. These stocks are Energy Transfer L.P. (NYSE:ET), National Grid plc (NYSE:NGG), Dow Inc. (NYSE:DOW), and Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA). All of these stocks’ market caps match EC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ET 29 763141 1
NGG 8 532366 0
DOW 33 325782 25
BBVA 7 181357 3
Average 19.25 450662 7.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $451 million. That figure was $190 million in EC’s case. Dow Inc. (NYSE:DOW) is the most popular stock in this table. On the other hand Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA) is the least popular one with only 7 bullish hedge fund positions. Ecopetrol S.A. (NYSE:EC) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately EC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); EC investors were disappointed as the stock returned -6.9% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.

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

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