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Were Hedge Funds Right About SM Energy Company (SM)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let’s take a look at whether SM Energy Company (NYSE:SM) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is SM Energy Company (NYSE:SM) a good investment now? Prominent investors are in an optimistic mood. The number of long hedge fund positions went up by 1 recently. Our calculations also showed that SM isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). SM was in 22 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 21 hedge funds in our database with SM positions at the end of the previous quarter.

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 41 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.

Charles Davidson - Wexford Capital

Charles Davidson of Wexford Capital

We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to review the fresh hedge fund action regarding SM Energy Company (NYSE:SM).

What have hedge funds been doing with SM Energy Company (NYSE:SM)?

At the end of the fourth quarter, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the third quarter of 2019. On the other hand, there were a total of 20 hedge funds with a bullish position in SM a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in SM Energy Company (NYSE:SM) was held by Citadel Investment Group, which reported holding $36.2 million worth of stock at the end of September. It was followed by Encompass Capital Advisors with a $31.2 million position. Other investors bullish on the company included D E Shaw, Millennium Management, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Encompass Capital Advisors allocated the biggest weight to SM Energy Company (NYSE:SM), around 1.99% of its 13F portfolio. Ellington is also relatively very bullish on the stock, designating 0.99 percent of its 13F equity portfolio to SM.

As aggregate interest increased, key money managers have been driving this bullishness. Encompass Capital Advisors, managed by Todd J. Kantor, initiated the biggest position in SM Energy Company (NYSE:SM). Encompass Capital Advisors had $31.2 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $7.7 million position during the quarter. The other funds with brand new SM positions are Clint Carlson’s Carlson Capital, Charles Davidson and Joseph Jacobs’s Wexford Capital, and Steve Cohen’s Point72 Asset Management.

Let’s now take a look at hedge fund activity in other stocks similar to SM Energy Company (NYSE:SM). We will take a look at Benchmark Electronics, Inc. (NYSE:BHE), Triumph Group Inc (NYSE:TGI), Revolve Group, Inc. (NYSE:RVLV), and Continental Building Products Inc (NYSE:CBPX). This group of stocks’ market valuations are closest to SM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BHE 19 52735 4
TGI 16 90783 2
RVLV 11 36551 -5
CBPX 22 168360 3
Average 17 87107 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $87 million. That figure was $126 million in SM’s case. Continental Building Products Inc (NYSE:CBPX) is the most popular stock in this table. On the other hand Revolve Group, Inc. (NYSE:RVLV) is the least popular one with only 11 bullish hedge fund positions. SM Energy Company (NYSE:SM) 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately SM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SM were disappointed as the stock returned -70.4% 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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