Did Hedge Funds Make The Right Call On Warrior Met Coal Inc. (HCC)?

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 Warrior Met Coal Inc. (NYSE:HCC) and determine whether hedge funds had an edge regarding this stock.

Warrior Met Coal Inc. (NYSE:HCC) was in 24 hedge funds’ portfolios at the end of the first quarter of 2020. HCC has seen a decrease in activity from the world’s largest hedge funds recently. There were 29 hedge funds in our database with HCC positions at the end of the previous quarter. Our calculations also showed that HCC 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).

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 58 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.

Louis Bacon Moore of Moore Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. 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 if you have any good ideas send us an email. With all of this in mind let’s take a glance at the fresh hedge fund action encompassing Warrior Met Coal Inc. (NYSE:HCC).

What have hedge funds been doing with Warrior Met Coal Inc. (NYSE:HCC)?

At Q1’s end, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the fourth quarter of 2019. By comparison, 35 hedge funds held shares or bullish call options in HCC a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Warrior Met Coal Inc. (NYSE:HCC) was held by Renaissance Technologies, which reported holding $26.2 million worth of stock at the end of September. It was followed by Contrarius Investment Management with a $23.8 million position. Other investors bullish on the company included Third Avenue Management, Encompass Capital Advisors, and Platinum Asset Management. In terms of the portfolio weights assigned to each position Contrarius Investment Management allocated the biggest weight to Warrior Met Coal Inc. (NYSE:HCC), around 3.05% of its 13F portfolio. Third Avenue Management is also relatively very bullish on the stock, setting aside 2.9 percent of its 13F equity portfolio to HCC.

Because Warrior Met Coal Inc. (NYSE:HCC) has faced bearish sentiment from the aggregate hedge fund industry, logic holds that there was a specific group of fund managers that elected to cut their full holdings heading into Q4. Interestingly, Steven Tananbaum’s GoldenTree Asset Management cut the largest position of the 750 funds watched by Insider Monkey, valued at about $17.6 million in stock, and Lee Ainslie’s Maverick Capital was right behind this move, as the fund cut about $4.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Warrior Met Coal Inc. (NYSE:HCC). These stocks are Vivint Solar Inc (NYSE:VSLR), P.H. Glatfelter Company (NYSE:GLT), Costamare Inc (NYSE:CMRE), and Argan, Inc. (NYSE:AGX). All of these stocks’ market caps are similar to HCC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $41 million. That figure was $135 million in HCC’s case. Vivint Solar Inc (NYSE:VSLR) is the most popular stock in this table. On the other hand P.H. Glatfelter Company (NYSE:GLT) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Warrior Met Coal Inc. (NYSE:HCC) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on HCC as the stock returned 45.6% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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