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Were Hedge Funds Right About Selling Innospec Inc. (IOSP)?

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Innospec Inc. (NASDAQ:IOSP).

Innospec Inc. (NASDAQ:IOSP) has experienced a decrease in support from the world’s most elite money managers in recent months. Our calculations also showed that IOSP 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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.

IOSP_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. Let’s review the new hedge fund action encompassing Innospec Inc. (NASDAQ:IOSP).

How have hedgies been trading Innospec Inc. (NASDAQ:IOSP)?

At Q2’s end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 13 hedge funds with a bullish position in IOSP a year ago. With hedgies’ capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Joe Huber - Huber Capital Management

More specifically, Royce & Associates was the largest shareholder of Innospec Inc. (NASDAQ:IOSP), with a stake worth $42.7 million reported as of the end of March. Trailing Royce & Associates was Huber Capital Management, which amassed a stake valued at $15.4 million. Algert Coldiron Investors, Gotham Asset Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Innospec Inc. (NASDAQ:IOSP) has faced a decline in interest from hedge fund managers, logic holds that there exists a select few funds who were dropping their entire stakes last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the largest position of the “upper crust” of funds followed by Insider Monkey, valued at about $0.5 million in stock. Andrew Feldstein and Stephen Siderow’s fund, Blue Mountain Capital, also dumped its stock, about $0.4 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Innospec Inc. (NASDAQ:IOSP). These stocks are Endava plc (NYSE:DAVA), ExlService Holdings, Inc. (NASDAQ:EXLS), Enphase Energy Inc (NASDAQ:ENPH), and Healthcare Services Group, Inc. (NASDAQ:HCSG). This group of stocks’ market valuations match IOSP’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DAVA 8 52160 2
EXLS 11 44825 1
ENPH 20 299148 1
HCSG 20 101308 -1
Average 14.75 124360 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $124 million. That figure was $73 million in IOSP’s case. Enphase Energy Inc (NASDAQ:ENPH) is the most popular stock in this table. On the other hand Endava plc (NYSE:DAVA) is the least popular one with only 8 bullish hedge fund positions. Innospec Inc. (NASDAQ:IOSP) 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 IOSP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); IOSP investors were disappointed as the stock returned -2.3% 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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