We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let’s take a look at whether Arco Platform Limited (NASDAQ:ARCE) is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Is Arco Platform Limited (NASDAQ:ARCE) a healthy stock for your portfolio? Prominent investors are in a bullish mood. The number of long hedge fund bets went up by 5 lately. Our calculations also showed that ARCE 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).
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 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 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.
Ken Griffin of Citadel Investment Group
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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 let’s review the new hedge fund action encompassing Arco Platform Limited (NASDAQ:ARCE).
What have hedge funds been doing with Arco Platform Limited (NASDAQ:ARCE)?
At the end of the fourth quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 42% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in ARCE over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
Among these funds, SCGE Management held the most valuable stake in Arco Platform Limited (NASDAQ:ARCE), which was worth $57.5 million at the end of the third quarter. On the second spot was Cartica Management which amassed $30.3 million worth of shares. Tekne Capital Management, ThornTree Capital Partners, and Alyeska Investment Group 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 Cartica Management allocated the biggest weight to Arco Platform Limited (NASDAQ:ARCE), around 19.82% of its 13F portfolio. Tekne Capital Management is also relatively very bullish on the stock, earmarking 10.55 percent of its 13F equity portfolio to ARCE.
As one would reasonably expect, key money managers have jumped into Arco Platform Limited (NASDAQ:ARCE) headfirst. Cartica Management, managed by Teresa Barger, initiated the largest position in Arco Platform Limited (NASDAQ:ARCE). Cartica Management had $30.3 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also made a $11.9 million investment in the stock during the quarter. The other funds with brand new ARCE positions are Carl Anderson’s Marcho Partners, Brian Ashford-Russell and Tim Woolley’s Polar Capital, and Ken Griffin’s Citadel Investment Group.
Let’s also examine hedge fund activity in other stocks similar to Arco Platform Limited (NASDAQ:ARCE). These stocks are The Ensign Group, Inc. (NASDAQ:ENSG), Saia Inc (NASDAQ:SAIA), Pluralsight, Inc. (NASDAQ:PS), and Visteon Corp (NYSE:VC). All of these stocks’ market caps are closest to ARCE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ENSG | 15 | 126763 | -3 |
| SAIA | 17 | 86146 | 1 |
| PS | 18 | 152506 | -4 |
| VC | 29 | 276807 | 6 |
| Average | 19.75 | 160556 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $161 million. That figure was $169 million in ARCE’s case. Visteon Corp (NYSE:VC) is the most popular stock in this table. On the other hand The Ensign Group, Inc. (NASDAQ:ENSG) is the least popular one with only 15 bullish hedge fund positions. Arco Platform Limited (NASDAQ:ARCE) is not the least popular stock in this group but hedge fund interest is still below average. 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 but still beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on ARCE as the stock returned -3.1% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
