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Were Hedge Funds Right About Piling Into Flowserve Corporation (FLS)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Flowserve Corporation (NYSE:FLS) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Flowserve Corporation (NYSE:FLS) has experienced an increase in activity from the world’s largest hedge funds in recent months. Our calculations also showed that FLS 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Alex Litowitz Magnetar Capital

Alec Litowitz of Magnetar Capital

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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now we’re going to take a look at the latest hedge fund action surrounding Flowserve Corporation (NYSE:FLS).

What have hedge funds been doing with Flowserve Corporation (NYSE:FLS)?

At Q1’s end, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in FLS over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, GAMCO Investors was the largest shareholder of Flowserve Corporation (NYSE:FLS), with a stake worth $46.9 million reported as of the end of September. Trailing GAMCO Investors was Adage Capital Management, which amassed a stake valued at $24.8 million. Impax Asset Management, Renaissance Technologies, and D E Shaw 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 GAMCO Investors allocated the biggest weight to Flowserve Corporation (NYSE:FLS), around 0.55% of its 13F portfolio. Engineers Gate Manager is also relatively very bullish on the stock, designating 0.32 percent of its 13F equity portfolio to FLS.

As aggregate interest increased, specific money managers were leading the bulls’ herd. Renaissance Technologies, initiated the most valuable position in Flowserve Corporation (NYSE:FLS). Renaissance Technologies had $20.2 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $14.1 million position during the quarter. The other funds with new positions in the stock are Greg Eisner’s Engineers Gate Manager, Benjamin A. Smith’s Laurion Capital Management, and Alec Litowitz and Ross Laser’s Magnetar Capital.

Let’s check out hedge fund activity in other stocks similar to Flowserve Corporation (NYSE:FLS). These stocks are MorphoSys AG (NASDAQ:MOR), Echostar Corporation (NASDAQ:SATS), Manpowergroup Inc (NYSE:MAN), and Popular Inc (NASDAQ:BPOP). This group of stocks’ market valuations are closest to FLS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MOR 5 14705 -1
SATS 24 428894 -2
MAN 23 244244 -4
BPOP 28 468895 -5
Average 20 289185 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $289 million. That figure was $181 million in FLS’s case. Popular Inc (NASDAQ:BPOP) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Flowserve Corporation (NYSE:FLS) 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 gained 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 FLS, though not to the same extent, as the stock returned 20.2% in Q2 and outperformed the market as well.

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