It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Arch Coal, Inc. (NYSE:ARCH).
Arch Coal, Inc. (NYSE:ARCH) investors should pay attention to a decrease in support from the world’s most elite money managers in recent months. ARCH was in 25 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 26 hedge funds in our database with ARCH positions at the end of the previous quarter. Our calculations also showed that ARCH isn’t among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let’s take a gander at the new hedge fund action regarding Arch Coal, Inc. (NYSE:ARCH).
How have hedgies been trading Arch Coal, Inc. (NYSE:ARCH)?
At the end of the fourth quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the second quarter of 2018. By comparison, 30 hedge funds held shares or bullish call options in ARCH a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Monarch Alternative Capital, managed by Michael Weinstock, holds the most valuable position in Arch Coal, Inc. (NYSE:ARCH). Monarch Alternative Capital has a $129.4 million position in the stock, comprising 7.3% of its 13F portfolio. On Monarch Alternative Capital’s heels is James Dondero of Highland Capital Management, with a $33.6 million position; the fund has 2.6% of its 13F portfolio invested in the stock. Other peers with similar optimism comprise Jim Simons’s Renaissance Technologies, Charles Paquelet’s Skylands Capital and Israel Englander’s Millennium Management.
Because Arch Coal, Inc. (NYSE:ARCH) has witnessed falling interest from the smart money, it’s easy to see that there were a few hedge funds that slashed their positions entirely last quarter. At the top of the heap, Alexander Mitchell’s Scopus Asset Management said goodbye to the largest investment of all the hedgies watched by Insider Monkey, valued at close to $9.9 million in stock. Frederick DiSanto’s fund, Ancora Advisors, also said goodbye to its stock, about $9.4 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 1 funds last quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Arch Coal, Inc. (NYSE:ARCH) but similarly valued. We will take a look at Varonis Systems Inc (NASDAQ:VRNS), Ensco Rowan plc (NYSE:ESV), Welbilt, Inc. (NYSE:WBT), and LegacyTexas Financial Group Inc (NASDAQ:LTXB). All of these stocks’ market caps are closest to ARCH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VRNS | 21 | 138429 | -1 |
| ESV | 34 | 291967 | 5 |
| WBT | 23 | 508373 | 1 |
| LTXB | 12 | 65493 | -2 |
| Average | 22.5 | 251066 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $251 million. That figure was $346 million in ARCH’s case. Ensco Rowan plc (NYSE:ESV) is the most popular stock in this table. On the other hand LegacyTexas Financial Group Inc (NASDAQ:LTXB) is the least popular one with only 12 bullish hedge fund positions. Arch Coal, Inc. (NYSE:ARCH) 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. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately ARCH wasn’t nearly as popular as these 15 stock and hedge funds that were betting on ARCH were disappointed as the stock returned 10.9% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.
