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Were Hedge Funds Right About Selling Teekay Corporation (TK)?

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 Teekay Corporation (NYSE:TK) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Teekay Corporation (NYSE:TK) shareholders have witnessed a decrease in hedge fund sentiment lately. TK was in 13 hedge funds’ portfolios at the end of March. There were 14 hedge funds in our database with TK holdings at the end of the previous quarter. Our calculations also showed that TK 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.

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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 15 largest gold producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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 let’s take a peek at the key hedge fund action regarding Teekay Corporation (NYSE:TK).

How are hedge funds trading Teekay Corporation (NYSE:TK)?

At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from one quarter earlier. By comparison, 10 hedge funds held shares or bullish call options in TK a year ago. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Teekay Corporation (NYSE:TK), which was worth $7.6 million at the end of the third quarter. On the second spot was Granite Point Capital which amassed $2.9 million worth of shares. Orbis Investment Management, Arrowstreet Capital, 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 Granite Point Capital allocated the biggest weight to Teekay Corporation (NYSE:TK), around 1.66% of its 13F portfolio. Dalton Investments is also relatively very bullish on the stock, setting aside 0.38 percent of its 13F equity portfolio to TK.

Judging by the fact that Teekay Corporation (NYSE:TK) has faced bearish sentiment from the smart money, we can see that there were a few money managers who were dropping their full holdings in the first quarter. Interestingly, Matthew Hulsizer’s PEAK6 Capital Management said goodbye to the largest position of the 750 funds followed by Insider Monkey, worth an estimated $0.3 million in stock. Donald Sussman’s fund, Paloma Partners, also said goodbye to its stock, about $0.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Teekay Corporation (NYSE:TK) but similarly valued. We will take a look at Netfin Acquisition Corp. (NASDAQ:NFIN), America First Multifamily Investors, L.P. (NASDAQ:ATAX), FuelCell Energy, Inc. (NASDAQ:FCEL), and Quotient Limited (NASDAQ:QTNT). This group of stocks’ market valuations resemble TK’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NFIN 12 56443 0
ATAX 1 240 -1
FCEL 6 3006 4
QTNT 20 144956 -2
Average 9.75 51161 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $51 million. That figure was $17 million in TK’s case. Quotient Limited (NASDAQ:QTNT) is the most popular stock in this table. On the other hand America First Multifamily Investors, L.P. (NASDAQ:ATAX) is the least popular one with only 1 bullish hedge fund positions. Teekay Corporation (NYSE:TK) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately TK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TK were disappointed as the stock returned -28.5% during the same time period 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 many of these stocks already outperformed the market so far this year.

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