Here is What Hedge Funds Think About EXCO Resources Inc (XCO)

Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant out-performance. These stocks have been on a tear since the end of June, outperforming large-cap index funds by more than 10 percentage points. That’s why we pay special attention to hedge fund activity in these stocks.

EXCO Resources Inc (NYSE:XCO) was in 11 hedge funds’ portfolios at the end of September. XCO shareholders have witnessed an increase in support from the world’s most successful money managers lately. There were 9 hedge funds in our database with XCO positions at the end of the previous quarter. At the end of this article we will also compare XCO to other stocks including Newcastle Investment Corp. (NYSE:NCT), Fidus Investment Corp (NASDAQ:FDUS), and WashingtonFirst Bankshares Inc (NASDAQ:WFBI) to get a better sense of its popularity.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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With all of this in mind, let’s analyze the fresh action surrounding EXCO Resources Inc (NYSE:XCO).

Hedge fund activity in EXCO Resources Inc (NYSE:XCO)

At the end of the third quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, an increase of 22% from the second quarter of 2016. By comparison, 11 hedge funds held shares or bullish call options in XCO heading into this year. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Invesco Private Capital (WL Ross), led by Wilbur Ross, holds the number one position in EXCO Resources Inc (NYSE:XCO). According to regulatory filings, the fund has a $54.7 million position in the stock, comprising 14.3% of its 13F portfolio. The second largest stake is held by Oaktree Capital Management, led by Howard Marks, which oversees a $40.4 million position; 0.5% of its 13F portfolio is allocated to the company. Other members of the smart money with similar optimism consist of Prem Watsa’s Fairfax Financial Holdings, Renaissance Technologies, one of the largest hedge funds in the worldand D. E. Shaw’s D E Shaw. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Now, key hedge funds were breaking ground themselves. Laurion Capital Management, led by Benjamin A. Smith, established the most outsized position in EXCO Resources Inc (NYSE:XCO). According to its latest 13F filing, the fund had $1.2 million invested in the company at the end of the quarter. Cliff Asness’s AQR Capital Management also made a $0.2 million investment in the stock during the quarter. The other funds with brand new XCO positions are Ken Griffin’s Citadel Investment Group and Israel Englander’s Millennium Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as EXCO Resources Inc (NYSE:XCO) but similarly valued. These stocks are Newcastle Investment Corp. (NYSE:NCT), Fidus Investment Corp (NASDAQ:FDUS), WashingtonFirst Bankshares Inc (NASDAQ:WFBI), and Gain Capital Holdings Inc (NYSE:GCAP). This group of stocks’ market caps are similar to XCO’s market cap.

As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $21 million. That figure was $131 million in XCO’s case. Gain Capital Holdings Inc (NYSE:GCAP) is the most popular stock in this table. On the other hand WashingtonFirst Bankshares Inc (NASDAQ:WFBI) is the least popular one with only 4 bullish hedge fund positions. EXCO Resources Inc (NYSE:XCO) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard GCAP might be a better candidate to consider taking a long position in.

Disclosure: none.