How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding HollyFrontier Corporation (NYSE:HFC) and determine whether hedge funds had an edge regarding this stock.
HollyFrontier Corporation (NYSE:HFC) has experienced an increase in hedge fund sentiment recently. HollyFrontier Corporation (NYSE:HFC) was in 27 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 40. Our calculations also showed that HFC isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Chuck Royce of Royce & Associates
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let's check out the recent hedge fund action surrounding HollyFrontier Corporation (NYSE:HFC).
How are hedge funds trading HollyFrontier Corporation (NYSE:HFC)?
Heading into the third quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in HFC over the last 20 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
The largest stake in HollyFrontier Corporation (NYSE:HFC) was held by AQR Capital Management, which reported holding $88.6 million worth of stock at the end of September. It was followed by D E Shaw with a $37.3 million position. Other investors bullish on the company included Citadel Investment Group, Encompass Capital Advisors, and Point72 Asset Management. In terms of the portfolio weights assigned to each position Encompass Capital Advisors allocated the biggest weight to HollyFrontier Corporation (NYSE:HFC), around 3.19% of its 13F portfolio. Hi-Line Capital Management is also relatively very bullish on the stock, setting aside 1.93 percent of its 13F equity portfolio to HFC.
As industrywide interest jumped, key money managers were breaking ground themselves. Encompass Capital Advisors, managed by Todd J. Kantor, established the largest position in HollyFrontier Corporation (NYSE:HFC). Encompass Capital Advisors had $23.9 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also made a $23.8 million investment in the stock during the quarter. The following funds were also among the new HFC investors: Dmitry Balyasny's Balyasny Asset Management, Chuck Royce's Royce & Associates, and Donald Sussman's Paloma Partners.
Let's go over hedge fund activity in other stocks similar to HollyFrontier Corporation (NYSE:HFC). These stocks are CRISPR Therapeutics AG (NASDAQ:CRSP), The Gap Inc. (NYSE:GPS), ServiceMaster Global Holdings Inc (NYSE:SERV), Primerica, Inc. (NYSE:PRI), Targa Resources Corp (NYSE:TRGP), BlackLine, Inc. (NASDAQ:BL), and Ultragenyx Pharmaceutical Inc (NASDAQ:RARE). This group of stocks' market caps match HFC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CRSP,31,296881,0 GPS,38,459419,14 SERV,35,725891,4 PRI,25,385205,2 TRGP,31,289537,2 BL,18,227498,0 RARE,24,352560,6 Average,28.9,390999,4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.9 hedge funds with bullish positions and the average amount invested in these stocks was $391 million. That figure was $274 million in HFC's case. The Gap Inc. (NYSE:GPS) is the most popular stock in this table. On the other hand BlackLine, Inc. (NASDAQ:BL) is the least popular one with only 18 bullish hedge fund positions. HollyFrontier Corporation (NYSE:HFC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HFC is 50.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately HFC wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HFC investors were disappointed as the stock returned -30% since Q2 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 in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.