This week we revisit a popular Factor Spotlight topic as we head into the thick of Q2 2021 earnings season. With a market bracing for a procession of earnings announcements, we will explore the various forms of crowding measures to better understand what names are most vulnerable to systematic pressures stemming from concentrated holdings across the investment management landscape. Before we dive in, we would like to offer our readers a complimentary ‘concentration’ analysis of your portfolio. To initiate a portfolio review, please register here.
Monitoring crowding metrics is a valuable way for fundamental investors to identify names in their portfolios that are especially popular longs or shorts within the institutional investment community. Crowded names tend to experience increased volatility when managers buy up outperformers and sell off underperformers. We saw this exact phenomenon play out in January during the short squeeze event that sent hedge funds scrambling to cover their shorts while simultaneously selling long positions.
This is illustrated below in the HF Crowding and Short Interest factors from the Wolfe Research QES US Broad risk model. In this model:
- Hedge Fund Crowding - measures the sensitivity of a stock to a long/short basket constructed using hedge fund intensity (% of float) and level (market value) based on 13F filings.
- Short Interest - measures the sensitivity of a stock to a long/short basket constructed using the ratio of shares borrowed for shorting to inventory available for lending.
In January, stocks with substantial short interest saw massive returns as retail investors pumped in money which, in turn, negatively impacted crowded stocks on the long side as hedge funds degrossed their portfolios.
Screening for Crowded Stocks
For this quarter’s installment, we are taking a new, focused approach to our crowding analysis by incorporating Wolfe Research’s sector models to pinpoint the most heavily crowded names at the start of earnings season in each segment of the market. Using Omega Point’s Security Search tool, we will start by filtering the Russell 3000 by size and liquidity to names with a market cap greater than $500m and ADV greater than $5m. From there, we will separate by GICS sector according to the sector models we are using below.
Now that we have our initial universe in order, we have two familiar factors from our previous Factor Spotlight Crowding series (HF Crowding & Short Interest) along with one new factor introduced in the sector models (ETF Crowding).
- ETF Crowding - measures the ratio of gross flows from ETF creation/redemption to notional trading volume over trailing 3-months.
For each crowding factor within the respective sector group, we can screen down to stocks that have an exposure greater than 1. The names are then further limited to include only those with idiosyncratic risk greater than 67% in the Axioma US Fundamental MH risk model. This idiosyncratic risk screen helps us isolate the names that are most likely to see large positive or negative swings in reaction to an earnings beat or miss.
This process identified 132 HF Crowding stocks, 94 ETF Crowding stocks, and 114 Short Interest stocks listed by sector group below.
Below are the top three crowded names (where available) in each sector group based on each factor criteria.
Digging through these initial “Top 3” lists, we can find interesting names to look at. As an example, CMPR is a stock that shows up at the top of the Industrials list for both HF Crowding and ETF Crowding exposure. What is especially important to note is that, although it doesn’t reach the top in Short Interest relative to other Industrials names, it does have a significant exposure.
CMPR Crowding Exposures
Over the course of the last year and, even more so, year-to-date, long crowding (HF and ETF) and Short Interest have been moving in opposite directions, nearly converging in April at high levels. CMPR released guidance yesterday ahead of its Q3 earnings call on April 28th which sent the stock down -4.75% on the day.
Actionability Ahead of Earnings
If you have interest in exploring the full list of crowded names or would like to take a look at your portfolio through the lens of these factors, we are happy to help. Should you find names that are particularly exposed to crowding factors, there are a number of actions that can be taken:
- If the conviction in a highly exposed name does not justify the risk at a current position, it might be worth trimming.
- If, on the flip side, there is a great deal of conviction, maintaining or even increasing the position might be the best decision.
- As discussed in our previous installment, there might also be opportunity to bet on a stock’s post-earnings volatility by way of a long straddle given the fact that these names face the pressures of crowding and high idiosyncratic risk simultaneously.
Regardless of the ultimate decisions, using unique risk model factors gives us valuable insight into the sometimes unforeseen forces at play in the market. Use of these factors can create a competitive advantage as well as mitigate unwanted risks in a portfolio.
US & Global Market Summary
US Market: 04/12/21 - 04/16/21
- Wall Street concluded another winning week with all three major benchmarks all gaining more than 1%. The S&P 500 and the Dow posted their fourth straight positive week, while the tech-heavy Nasdaq has registered gains for three weeks in a row.
- Q1 corporate earnings have largely topped already lofty estimates with big banks posting rising sales and profits to coincide with a strengthening economic backdrop.
- Federal Reserve Governor Christopher Waller said Friday that the U.S. economy is set to take off, but there’s still no reason to start tightening policy.
- Retail sales rose in March by the most since May 2020, fueled by a combination of stimulus spending and broadening business reopenings.
- The University of Michigan said Friday its preliminary consumer sentiment index rose to a one-year high of 86.5 in the first half of this month.
- The Labor Department reported 576,000 first-time filings for unemployment insurance for the week ended April 10, reaching the lowest level since March 2020.
Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)
Methodology for normalized factor returns
- Growth leapt into positive terrain and sits atop the US factor leaderboard for the third straight week, far away from its Extremely Oversold status of -2.44 less than a month ago.
- Momentum and Profitability saw continued gains along with Size which is hovering at Extremely Overbought levels.
- Volatility kept on the brakes for the second straight week halting its longer-term slide .
- Market Sensitivity slid for the third straight week along with Earnings Yield which now sits at the cusp of the historical mean.
- Value’s freefall continues pushing it into negative territory and landing it at the bottom of the US factor leaderboard for the third straight week.
- US Total Risk (using the Russell 3000 as proxy) declined by 46 basis points.
Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)
Methodology for normalized factor returns
- Growth continues to lead the way for the third straight week further highlighting a clear rotation away from Value.
- Profitability maintains its upward trajectory and moves into Extremely Overbought space.
- Momentum continued its recent surge and crossed the positive threshold last seen on Mar 1.
- Market Sensitivity and Volatility both saw declines for the 4th week in a row.
- Earnings Yield fell once again moving it further away from Extremely Overbought status seen just 2 weeks ago.
- Value dipped furher into negative terrain and finishes the week as the bottom of the global factor leaderboard once again.
- Global Risk (using the ACWI as proxy) decreased by 56bps.