Were Hedge Funds Right About Dumping Reliance Steel & Aluminum Co. (RS)?

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 Reliance Steel & Aluminum Co. (NYSE:RS)? The smart money sentiment can provide an answer to this question.

Reliance Steel & Aluminum Co. (NYSE:RS) was in 18 hedge funds’ portfolios at the end of March. The all time high for this statistic is 34. RS has seen a decrease in hedge fund sentiment in recent months. There were 27 hedge funds in our database with RS holdings at the end of December. Our calculations also showed that RS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

David Harding

David Harding of Winton Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we’re going to analyze the latest hedge fund action encompassing Reliance Steel & Aluminum Co. (NYSE:RS).

Do Hedge Funds Think RS Is A Good Stock To Buy Now?

Heading into the second quarter of 2021, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in RS a year ago. 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).

Is RS A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Royce & Associates, managed by Chuck Royce, holds the most valuable position in Reliance Steel & Aluminum Co. (NYSE:RS). Royce & Associates has a $61.1 million position in the stock, comprising 0.4% of its 13F portfolio. Coming in second is Scopus Asset Management, managed by Alexander Mitchell, which holds a $49.8 million position; 0.6% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism consist of D. E. Shaw’s D E Shaw, Cliff Asness’s AQR Capital Management and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Lodge Hill Capital allocated the biggest weight to Reliance Steel & Aluminum Co. (NYSE:RS), around 6.78% of its 13F portfolio. Scopus Asset Management is also relatively very bullish on the stock, setting aside 0.63 percent of its 13F equity portfolio to RS.

Judging by the fact that Reliance Steel & Aluminum Co. (NYSE:RS) has witnessed bearish sentiment from the smart money, it’s easy to see that there is a sect of hedgies that elected to cut their full holdings in the first quarter. Interestingly, Phill Gross and Robert Atchinson’s Adage Capital Management dumped the biggest position of all the hedgies tracked by Insider Monkey, comprising an estimated $36 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund said goodbye to about $17.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 9 funds in the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Reliance Steel & Aluminum Co. (NYSE:RS) but similarly valued. We will take a look at Algonquin Power & Utilities Corp. (NYSE:AQN), Magellan Midstream Partners, L.P. (NYSE:MMP), Owens Corning (NYSE:OC), Athene Holding Ltd. (NYSE:ATH), Morningstar, Inc. (NASDAQ:MORN), Regency Centers Corp (NYSE:REG), and Aramark (NYSE:ARMK). This group of stocks’ market values are closest to RS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AQN 10 172616 -5
MMP 14 85039 -8
OC 30 284972 -8
ATH 44 1349076 8
MORN 25 1044340 6
REG 17 132833 -7
ARMK 39 1062881 6
Average 25.6 590251 -1.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.6 hedge funds with bullish positions and the average amount invested in these stocks was $590 million. That figure was $284 million in RS’s case. Athene Holding Ltd. (NYSE:ATH) is the most popular stock in this table. On the other hand Algonquin Power & Utilities Corp. (NYSE:AQN) is the least popular one with only 10 bullish hedge fund positions. Reliance Steel & Aluminum Co. (NYSE:RS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for RS is 23.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately RS wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); RS investors were disappointed as the stock returned -0.2% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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