Breaking News
Investing Pro 0
👀 Bezos, Buffett & Berkowitz: What's in Their Portfolios? Unlock Data

Fundamental Stock Pickers May Have an Easier Time Generating Alpha in 2023

By ValueWalk (Jacob Wolinsky)Market OverviewMar 02, 2023 02:55
ph.investing.com/analysis/fundamental-stock-pickers-may-have-an-easier-time-generating-alpha-in-2023-155967
Fundamental Stock Pickers May Have an Easier Time Generating Alpha in 2023
By ValueWalk (Jacob Wolinsky)   |  Mar 02, 2023 02:55
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
FSLR
-0.96%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
MRNA
+1.55%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
SEDG
-1.25%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
ETSY
+3.68%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
VSTO
+3.97%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
COMM
+10.00%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

In 2022, the vast majority of hedge funds struggled to generate returns for their investors. As stock-picking funds generated negative returns, global macro funds came out the big winners. However, in 2023, it's looking like things could be turning around for stock pickers.

More Micro, Less Macro

Goldman Sachs reported in its recent "Hedge Fund Trend Monitor" that the average stock has become far less macro-driven in the last few months, suggesting an improving environment for alpha generation. The firm explained that recession fears and elevated volatility around interest rates combined to create a particularly macro-driven environment in 2022.

However, more recently, company-specific factors have driven an increasing share of stock returns. As a result, Goldman Sachs believes the unusually high gross exposures among hedge funds appear to be well-timed to take advantage of the current environment.

The firm added that rising dispersions in returns and tumbling stock correlations also suggest an improving environment for stock pickers. Much of 2022 was marked by below-average dispersions in returns and above-average stock correlations. However, all those measures have recently shifted back toward their averages over the last few decades.

Of course, absolute fund returns depend not only on alpha generation but also on managing market beta and other macro exposures. However, Goldman Sachs reported that after controlling for equity market betas, hedge funds generally tend to perform better during micro-driven return environments like the current one and the period in the mid-2000s. In 2022, macro factors drove most of the stock market returns.

Goldman Sachs estimated dispersion scores for every stock in the S&P 500 based on the macro- versus the micro-driven portions of their recent returns. The firm also modeled the volatility of future micro-driven returns to determine the S&P 500 stocks most likely to generate significant alpha in the coming months.Stocks that could generate significant alpha in 2023

According to Goldman, the stocks with the highest dispersion scores are likely to generate significant alpha, either through outperformance or underperformance. At the top of the list are:

  • Enphase Energy (NASDAQ:ENPH)
  • Moderna (NASDAQ:MRNA)
  • Align (NASDAQ:ALGN) Technology
  • First Solar (NASDAQ:FSLR
  • Bath & Body Works (NYSE:BBWI)
  • SolarEdge Technologies (NASDAQ:SEDG)
  • Tesla (NASDAQ:TSLA)
  • Illumina (NASDAQ:ILMN)
  • DexCom (NASDAQ:DXCM)
  • Etsy (NASDAQ:ETSY)

Of note, Enphase Energy had plunged 23% as of the date of the "Hedge Fund Trend Monitor," although it has recovered slightly at a year-to-date return of around -15%. The only other stock in the top 10 that was in the red for 2023 at the time of the report was Moderna, which was down 4% for the year then but has since plummeted further, now off by 25% year to date.

At the other end of the spectrum were Tesla and Align Technology, up 64% and 55%, respectively, at the time of Goldman's report. Since then, Tesla has skyrocketed further and is now up 86% year to date, while Alight Technology has pulled back slightly but remains up 45% year to date.

One other noteworthy point is that hedge funds own 28% of Bed Bath & Beyond (NASDAQ:BBBY)'s market capitalization, the highest share by far of the top 10 on Goldman's list.
Of the 25 stocks on Goldman's list of the 25 most likely to generate significant alpha in the coming months, only Netflix (NASDAQ:NFLX), EQT Corp (NYSE:EQT). and Advanced Micro Devices (NASDAQ:AMD) were top positions among hedge funds as of the fourth quarter.

Other stocks of note on the alpha-generate list include Wynn Resorts (NASDAQ:WYNN), Generac Holdings (NYSE:GNRC), United Airlines, CarMax (NYSE:KMX), Las Vegas Sands (NYSE:LVS), and Caesars (NASDAQ:CZR) Entertainment.

Potential Alpha Opportunities in Spinoffs

Goldman Sachs also reported the "ongoing spinoff renaissance" could also provide alpha-generation opportunities for fundamental-driven investors. Last year saw 44 spinoffs announced, the second-highest total ever recorded, and Goldman expects spinoffs to remain popular this year.

The firm noted significant hedge fund ownership of many of the companies with pending spinoffs. For example, hedge funds own 22% of CommScope Holding (NASDAQ:COMM)'s market cap. General Electric (NYSE:GE), Vista Outdoor (NYSE:VSTO), and NCR (NYSE:NCR) Corporation each have two spinoffs pending, while Kellogg Company (NYSE:K) has three in the works.

Other stocks of note on Goldman's spinoff list include Johnson & Johnson (NYSE:JNJ), 3M Company (NYSE:MMM), Madison Square Garden, Danaher Corporation (NYSE:DHR), and Fidelity National Information Services.

Momentum Reversal

Another factor driving the resurgence in hedge fund returns has be a reversal in the momentum factor. Goldman Sachs highlighted the strong volatility in its "Hedge Fund Trend Monitor" for the previous quarter. That volatility transitioned at the beginning of 2023, becoming one of the sharpest monthly momentum reversals ever recorded.

Goldman's long/ short momentum factor plummeted 20% between the end of December and the beginning of February, marking a first-percentile drawdown since 1980. The firm explained that this magnitude of move typically characterizes recessions, although it also occurred during the tech bubble of the late 1990s and during the crash in 1987.
According to Goldman, the momentum reversal has also played a role in boosting hedge fund returns of late. In fact, hedge funds started 2023 with their long portfolios tilted further away from momentum than they have ever been in previous records.

Momentum Versus Value and Growth

The firm explained that funds' characteristic tilt toward growth and away from value largely explains this anti-momentum dynamic. According to Goldman's data, a tilt toward growth and away from value has been negatively correlated with momentum since value's outperformance over much of the last two years.

At the sector level, hedge funds have largely been pro-momentum toward the classical cyclical sectors, although they've been moving away from those sectors in recent quarters. At the time of the latest rebalance at the beginning of February, momentum had a large net tilt toward energy and away from information technology and communication services. That positioning is the opposite of recent sector rotations among hedge funds.

Goldman Sachs reported that momentum has generally tended to move sideways after other similar reversals in recent decades. The firm noted that momentum typically rebounds briefly immediately after sharp drawdowns, just as it has in recent weeks. Thus, history suggests another modest dip for momentum before a return to treading water.

***

Disclosure: No positions

Fundamental Stock Pickers May Have an Easier Time Generating Alpha in 2023
 

Related Articles

Fundamental Stock Pickers May Have an Easier Time Generating Alpha in 2023

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email