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. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Archrock, Inc. (NYSE:AROC) has seen an increase in enthusiasm from smart money of late. AROC was in 11 hedge funds’ portfolios at the end of the third quarter of 2019. There were 8 hedge funds in our database with AROC holdings at the end of the previous quarter. Our calculations also showed that AROC 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example, Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s view the latest hedge fund action regarding Archrock, Inc. (NYSE:AROC).
What have hedge funds been doing with Archrock, Inc. (NYSE:AROC)?
Heading into the fourth quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 38% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in AROC a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
The largest stake in Archrock, Inc. (NYSE:AROC) was held by Royce & Associates, which reported holding $8.1 million worth of stock at the end of September. It was followed by Intrinsic Edge Capital with a $3.5 million position. Other investors bullish on the company included Arrowstreet Capital, Millennium Management, and D E Shaw. In terms of the portfolio weights assigned to each position, Intrinsic Edge Capital allocated the biggest weight to Archrock, Inc. (NYSE:AROC), around 0.39% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 0.07 percent of its 13F equity portfolio to AROC.
Consequently, key hedge funds were leading the bulls’ herd. Intrinsic Edge Capital, managed by Mark Coe, created the most valuable position in Archrock, Inc. (NYSE:AROC). Intrinsic Edge Capital had $3.5 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $2.2 million position during the quarter. The other funds with new positions in the stock are Steve Cohen’s Point72 Asset Management and Mike Vranos’s Ellington.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Archrock, Inc. (NYSE:AROC) but similarly valued. These stocks are USANA Health Sciences, Inc. (NYSE:USNA), HNI Corp (NYSE:HNI), Tricida, Inc. (NASDAQ:TCDA), and Magellan Health Inc (NASDAQ:MGLN). This group of stocks’ market values are similar to AROC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| USNA | 12 | 169990 | -1 |
| HNI | 16 | 79013 | 2 |
| TCDA | 17 | 702923 | 0 |
| MGLN | 17 | 284049 | -2 |
| Average | 15.5 | 308994 | -0.25 |
View the table here if you experience formatting issues.
As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $309 million. That figure was $21 million in AROC’s case. Tricida, Inc. (NASDAQ:TCDA) is the most popular stock in this table. On the other hand, USANA Health Sciences, Inc. (NYSE:USNA) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Archrock, Inc. (NYSE:AROC) is even less popular than USNA. Hedge funds dodged a bullet by taking a bearish stance towards AROC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately, AROC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AROC investors were disappointed as the stock returned -14.4% 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
