Were Hedge Funds Right About Steel Dynamics, Inc. (STLD)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtSteel Dynamics, Inc. (NASDAQ:STLD) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Steel Dynamics, Inc. (NASDAQ:STLD) an exceptional stock to buy now? Money managers were selling. The number of long hedge fund positions dropped by 8 in recent months. Our calculations also showed that STLD 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). STLD was in 27 hedge funds’ portfolios at the end of March. There were 35 hedge funds in our database with STLD holdings at the end of the previous quarter.

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.

Wall Street Bull

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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. Keeping this in mind let’s view the key hedge fund action encompassing Steel Dynamics, Inc. (NASDAQ:STLD).

Hedge fund activity in Steel Dynamics, Inc. (NASDAQ:STLD)

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the previous quarter. By comparison, 27 hedge funds held shares or bullish call options in STLD a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Steel Dynamics, Inc. (NASDAQ:STLD) was held by D E Shaw, which reported holding $107.2 million worth of stock at the end of September. It was followed by AQR Capital Management with a $88.1 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Anchor Bolt Capital allocated the biggest weight to Steel Dynamics, Inc. (NASDAQ:STLD), around 4.63% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, designating 0.61 percent of its 13F equity portfolio to STLD.

Because Steel Dynamics, Inc. (NASDAQ:STLD) has experienced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of funds who were dropping their entire stakes by the end of the first quarter. It’s worth mentioning that Alexander Mitchell’s Scopus Asset Management dropped the largest investment of the 750 funds tracked by Insider Monkey, comprising an estimated $28.9 million in stock. Sara Nainzadeh’s fund, Centenus Global Management, also sold off its stock, about $4.6 million worth. These moves are interesting, as total hedge fund interest fell by 8 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Steel Dynamics, Inc. (NASDAQ:STLD) but similarly valued. These stocks are First American Financial Corp (NYSE:FAF), PG&E Corporation (NYSE:PCG), Nuance Communications Inc. (NASDAQ:NUAN), and AECOM (NYSE:ACM). This group of stocks’ market values match STLD’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FAF 40 525520 -2
PCG 48 1984927 -2
NUAN 42 764864 3
ACM 39 670829 3
Average 42.25 986535 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.25 hedge funds with bullish positions and the average amount invested in these stocks was $987 million. That figure was $331 million in STLD’s case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand AECOM (NYSE:ACM) is the least popular one with only 39 bullish hedge fund positions. Compared to these stocks Steel Dynamics, Inc. (NASDAQ:STLD) is even less popular than ACM. Hedge funds dodged a bullet by taking a bearish stance towards STLD. 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 STLD wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); STLD investors were disappointed as the stock returned 16.9% 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.