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Were Hedge Funds Right About Flocking Into Cenovus Energy Inc (CVE) ?

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The fourth quarter of 2018 is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Cenovus Energy Inc (NYSE:CVE).

Is Cenovus Energy Inc (NYSE:CVE) going to take off soon? Investors who are in the know are taking an optimistic view. The number of long hedge fund bets went up by 7 lately. Our calculations also showed that CVE isn’t among the 30 most popular stocks among hedge funds.

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 32 percentage points since May 2014 through March 12, 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.

GOTHAM ASSET MANAGEMENT

Let’s check out the new hedge fund action encompassing Cenovus Energy Inc (NYSE:CVE).

How are hedge funds trading Cenovus Energy Inc (NYSE:CVE)?

Heading into the first quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 54% from the second quarter of 2018. By comparison, 18 hedge funds held shares or bullish call options in CVE a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

CVE_mar2019

Of the funds tracked by Insider Monkey, Richard S. Pzena’s Pzena Investment Management has the largest position in Cenovus Energy Inc (NYSE:CVE), worth close to $148.3 million, amounting to 0.9% of its total 13F portfolio. The second largest stake is held by Luminus Management, managed by Jonathan Barrett and Paul Segal, which holds a $106.8 million position; 2.2% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism encompass Steve Cohen’s Point72 Asset Management, Ken Griffin’s Citadel Investment Group and Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors.

As aggregate interest increased, some big names have jumped into Cenovus Energy Inc (NYSE:CVE) headfirst. Waratah Capital Advisors, managed by Brad Dunkley and Blair Levinsky, assembled the most outsized position in Cenovus Energy Inc (NYSE:CVE). Waratah Capital Advisors had $14.6 million invested in the company at the end of the quarter. Joel Greenblatt’s Gotham Asset Management also initiated a $4.8 million position during the quarter. The following funds were also among the new CVE investors: Steve Cohen’s Point72 Asset Management, Matt Smith’s Deep Basin Capital, and Sara Nainzadeh’s Centenus Global Management.

Let’s check out hedge fund activity in other stocks similar to Cenovus Energy Inc (NYSE:CVE). These stocks are Melco Resorts & Entertainment Limited (NASDAQ:MLCO), Herbalife Nutrition Ltd. (NYSE:HLF), Centrais Elétricas Brasileiras S.A. – Eletrobras (NYSE:EBR), and Zebra Technologies Corporation (NASDAQ:ZBRA). This group of stocks’ market valuations match CVE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MLCO 21 318428 -6
HLF 29 4017098 -9
EBR 5 10002 1
ZBRA 29 750726 2
Average 21 1274064 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $1274 million. That figure was $390 million in CVE’s case. Herbalife Nutrition Ltd. (NYSE:HLF) is the most popular stock in this table. On the other hand Centrais Elétricas Brasileiras S.A. – Eletrobras (NYSE:EBR) is the least popular one with only 5 bullish hedge fund positions. Cenovus Energy Inc (NYSE:CVE) 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 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Hedge funds were also right about betting on CVE as the stock returned 37.9% and outperformed the market as well. You can see the entire list of these shrewd hedge funds here.

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

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