Were Hedge Funds Right About Selling Sociedad Quimica y Minera de Chile S.A. (SQM)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) and determine whether hedge funds skillfully traded this stock.

Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) was in 10 hedge funds’ portfolios at the end of the first quarter of 2020. SQM shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. There were 13 hedge funds in our database with SQM holdings at the end of the previous quarter. Our calculations also showed that SQM 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.

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 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 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.


Howard Marks of Oaktree Capital Management

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. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to check out the new hedge fund action surrounding Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM).

Hedge fund activity in Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM)

Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -23% from the previous quarter. By comparison, 9 hedge funds held shares or bullish call options in SQM a year ago. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the most valuable position in Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM). Citadel Investment Group has a $15.6 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Coming in second is SailingStone Capital Partners, managed by MacKenzie B. Davis and Kenneth L. Settles Jr, which holds a $12.8 million position; 7.2% of its 13F portfolio is allocated to the company. Remaining peers that are bullish contain Howard Marks’s Oaktree Capital Management, Jonathan Barrett and Paul Segal’s Luminus Management and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position SailingStone Capital Partners allocated the biggest weight to Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM), around 7.18% of its 13F portfolio. Appian Way Asset Management is also relatively very bullish on the stock, setting aside 0.76 percent of its 13F equity portfolio to SQM.

Judging by the fact that Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) has experienced a decline in interest from hedge fund managers, it’s easy to see that there were a few hedgies who were dropping their entire stakes by the end of the first quarter. Interestingly, Dmitry Balyasny’s Balyasny Asset Management cut the biggest investment of all the hedgies tracked by Insider Monkey, comprising an estimated $7.5 million in stock, Renaissance Technologies was right behind this move, as the fund cut about $5.7 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 3 funds by the end of the first quarter.

Let’s now review hedge fund activity in other stocks similar to Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM). We will take a look at Amedisys Inc (NASDAQ:AMED), The Stars Group Inc. (NASDAQ:TSG), TIM Participacoes SA (NYSE:TSU), and CF Industries Holdings, Inc. (NYSE:CF). All of these stocks’ market caps match SQM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AMED 20 244124 -2
TSG 34 1097115 -11
TSU 11 154487 0
CF 34 606091 -7
Average 24.75 525454 -5

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $525 million. That figure was $54 million in SQM’s case. The Stars Group Inc. (NASDAQ:TSG) is the most popular stock in this table. On the other hand TIM Participacoes SA (NYSE:TSU) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) is even less popular than TSU. Hedge funds dodged a bullet by taking a bearish stance towards SQM. Our calculations showed that the top 10 most popular hedge fund stocks 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 managed to beat the market by 15.5 percentage points. Unfortunately SQM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); SQM investors were disappointed as the stock returned 17.7% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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