Hedge Funds Have Never Been Less Bullish On Transocean Ltd (RIG)

Debasis Saha

Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. Is Transocean Ltd (NYSE:RIG) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Transocean Ltd (NYSE:RIG) was in 26 hedge funds' portfolios at the end of the fourth quarter of 2019. RIG investors should pay attention to a decrease in hedge fund interest lately. There were 39 hedge funds in our database with RIG holdings at the end of the previous quarter. Our calculations also showed that RIG 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).

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.

[caption id="attachment_339612" align="aligncenter" width="400"] Kerr Neilson of Platinum Asset Management[/caption]

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. 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 take a gander at the fresh hedge fund action regarding Transocean Ltd (NYSE:RIG).

How have hedgies been trading Transocean Ltd (NYSE:RIG)?

At Q4's end, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from the previous quarter. On the other hand, there were a total of 33 hedge funds with a bullish position in RIG a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

Is RIG A Good Stock To Buy?

Among these funds, Contrarius Investment Management held the most valuable stake in Transocean Ltd (NYSE:RIG), which was worth $179.7 million at the end of the third quarter. On the second spot was Platinum Asset Management which amassed $125.2 million worth of shares. Luminus Management, Citadel Investment Group, and Avenue Capital 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 Avenue Capital allocated the biggest weight to Transocean Ltd (NYSE:RIG), around 17.55% of its 13F portfolio. Contrarius Investment Management is also relatively very bullish on the stock, designating 9.42 percent of its 13F equity portfolio to RIG.

Judging by the fact that Transocean Ltd (NYSE:RIG) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there exists a select few fund managers that slashed their full holdings in the third quarter. Interestingly, Lee Ainslie's Maverick Capital dropped the biggest investment of the "upper crust" of funds tracked by Insider Monkey, valued at about $4.4 million in stock, and D. E. Shaw's D E Shaw was right behind this move, as the fund said goodbye to about $3.4 million worth. These moves are interesting, as total hedge fund interest dropped by 13 funds in the third quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Transocean Ltd (NYSE:RIG) but similarly valued. We will take a look at Cabot Microelectronics Corporation (NASDAQ:CCMP), Stag Industrial Inc (NYSE:STAG), Lazard Ltd (NYSE:LAZ), and ALLETE Inc (NYSE:ALE). All of these stocks' market caps are closest to RIG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CCMP,24,382670,7 STAG,18,126164,-6 LAZ,14,701694,-1 ALE,25,252011,3 Average,20.25,365635,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $366 million. That figure was $616 million in RIG's case. ALLETE Inc (NYSE:ALE) is the most popular stock in this table. On the other hand Lazard Ltd (NYSE:LAZ) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Transocean Ltd (NYSE:RIG) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately RIG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on RIG were disappointed as the stock returned -80.8% during the first two and a half months of 2020 (through March 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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