Is Arch Coal, Inc. (ARCH) Going to Burn These Hedge Funds?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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).

Is Arch Coal, Inc. (NYSE:ARCH) the right pick for your portfolio? Prominent investors are reducing their bets on the stock. The number of long hedge fund positions dropped by 1 lately. Our calculations also showed that ARCH isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

Video: Click the image to 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’ 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jonathan Barrett of Luminus Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s view the recent hedge fund action surrounding Arch Coal, Inc. (NYSE:ARCH).

How have hedgies been trading Arch Coal, Inc. (NYSE:ARCH)?

At Q3’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. On the other hand, there were a total of 26 hedge funds with a bullish position in ARCH a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

The largest stake in Arch Coal, Inc. (NYSE:ARCH) was held by Luminus Management, which reported holding $83.2 million worth of stock at the end of September. It was followed by Monarch Alternative Capital with a $73.2 million position. Other investors bullish on the company included Highland Capital Management, Skylands Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Monarch Alternative Capital allocated the biggest weight to Arch Coal, Inc. (NYSE:ARCH), around 6.39% of its portfolio. Skylands Capital is also relatively very bullish on the stock, designating 3.82 percent of its 13F equity portfolio to ARCH.

Judging by the fact that Arch Coal, Inc. (NYSE:ARCH) has witnessed a decline in interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of money managers that elected to cut their positions entirely heading into Q4. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dropped the largest stake of the 750 funds followed by Insider Monkey, valued at an estimated $1.6 million in stock, and Alec Litowitz and Ross Laser’s Magnetar Capital was right behind this move, as the fund cut about $1 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 1 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to Arch Coal, Inc. (NYSE:ARCH). We will take a look at MSG Networks Inc (NYSE:MSGN), Bright Scholar Education Holdings Limited (NYSE:BEDU), Raven Industries, Inc. (NASDAQ:RAVN), and RPC, Inc. (NYSE:RES). This group of stocks’ market caps resemble ARCH’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $136 million. That figure was $299 million in ARCH’s case. MSG Networks Inc (NYSE:MSGN) is the most popular stock in this table. On the other hand Bright Scholar Education Holdings Limited (NYSE:BEDU) is the least popular one with only 9 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ARCH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ARCH were disappointed as the stock returned 0.5% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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