At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Cimarex Energy Co (NYSE:XEC) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Cimarex Energy Co (NYSE:XEC) a sound investment now? Money managers were turning bullish. The number of bullish hedge fund bets advanced by 4 lately. Cimarex Energy Co (NYSE:XEC) was in 39 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 43. Our calculations also showed that XEC 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.
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 58 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.
Israel Englander of Millennium Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. 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 read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now let’s take a look at the key hedge fund action surrounding Cimarex Energy Co (NYSE:XEC).
How have hedgies been trading Cimarex Energy Co (NYSE:XEC)?
At second quarter’s end, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from the previous quarter. On the other hand, there were a total of 27 hedge funds with a bullish position in XEC a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of Cimarex Energy Co (NYSE:XEC), with a stake worth $79.6 million reported as of the end of September. Trailing Citadel Investment Group was Diamond Hill Capital, which amassed a stake valued at $59.8 million. Encompass Capital Advisors, Millennium Management, and Deep Basin 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 Encompass Capital Advisors allocated the biggest weight to Cimarex Energy Co (NYSE:XEC), around 7.16% of its 13F portfolio. Deep Basin Capital is also relatively very bullish on the stock, earmarking 7.02 percent of its 13F equity portfolio to XEC.
As industrywide interest jumped, key money managers were breaking ground themselves. ExodusPoint Capital, managed by Michael Gelband, initiated the most valuable position in Cimarex Energy Co (NYSE:XEC). ExodusPoint Capital had $5.7 million invested in the company at the end of the quarter. John Overdeck and David Siegel’s Two Sigma Advisors also made a $2.8 million investment in the stock during the quarter. The other funds with brand new XEC positions are David Andre and Astro Teller’s Cerebellum Capital, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, and Qing Li’s Sciencast Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Cimarex Energy Co (NYSE:XEC) but similarly valued. We will take a look at Navistar International Corp (NYSE:NAV), STAAR Surgical Company (NASDAQ:STAA), Goosehead Insurance, Inc. (NASDAQ:GSHD), FirstCash, Inc. (NASDAQ:FCFS), Varonis Systems Inc (NASDAQ:VRNS), Insmed Incorporated (NASDAQ:INSM), and MGIC Investment Corporation (NYSE:MTG). This group of stocks’ market values are closest to XEC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NAV | 33 | 1245849 | -3 |
| STAA | 20 | 920886 | -1 |
| GSHD | 15 | 114944 | 4 |
| FCFS | 22 | 144073 | 6 |
| VRNS | 28 | 604539 | 8 |
| INSM | 30 | 613700 | 10 |
| MTG | 40 | 262992 | -1 |
| Average | 26.9 | 558140 | 3.3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.9 hedge funds with bullish positions and the average amount invested in these stocks was $558 million. That figure was $557 million in XEC’s case. MGIC Investment Corporation (NYSE:MTG) is the most popular stock in this table. On the other hand Goosehead Insurance, Inc. (NASDAQ:GSHD) is the least popular one with only 15 bullish hedge fund positions. Cimarex Energy Co (NYSE:XEC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for XEC is 84.2. 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 positive signal but 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately XEC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on XEC were disappointed as the stock returned 1.8% during the same time period 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 many of these stocks already outperformed the market so far this year.
Follow Cimarex Energy Co (NYSE:XEC)
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Disclosure: None. This article was originally published at Insider Monkey.
