Is Compass Minerals International, Inc. (CMP) Going to Burn These Hedge Funds?

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.

Compass Minerals International, Inc. (NYSE:CMP) was in 6 hedge funds’ portfolios at the end of the third quarter of 2016. CMP shareholders have witnessed a decrease in hedge fund interest in recent months. There were 11 hedge funds in our database with CMP positions at the end of the previous quarter. At the end of this article we will also compare CMP to other stocks including TCF Financial Corporation (NYSE:TCB), Kosmos Energy Ltd (NYSE:KOS), and Essent Group Ltd (NYSE:ESNT) 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.

Sunny Forest/Shutterstock.com

Keeping this in mind, we’re going to take a peek at the new action regarding Compass Minerals International, Inc. (NYSE:CMP).

How have hedgies been trading Compass Minerals International, Inc. (NYSE:CMP)?

At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a plunge of 45% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CMP over the last 5 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Millennium Management, one of the largest hedge funds in the world, has the largest position in Compass Minerals International, Inc. (NYSE:CMP), worth close to $27 million, accounting for less than 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is Cardinal Capital, led by Amy Minella, holding a $16.8 million position; 0.8% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that are bullish comprise Chuck Royce’s Royce & Associates, Ken Griffin’s Citadel Investment Group and Matthew Hulsizer’s PEAK6 Capital Management. 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.

Because Compass Minerals International, Inc. (NYSE:CMP) has witnessed a decline in interest from the smart money, logic holds that there exists a select few funds that decided to sell off their positions entirely in the third quarter. Intriguingly, Citadel Investment Group dropped the biggest investment of the 700 funds followed by Insider Monkey, worth close to $1.2 million in call options. Michael Platt and William Reeves’s fund, BlueCrest Capital Mgmt., also said goodbye to its stock, about $0.5 million worth of CMP shares.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Compass Minerals International, Inc. (NYSE:CMP) but similarly valued. These stocks are TCF Financial Corporation (NYSE:TCB), Kosmos Energy Ltd (NYSE:KOS), Essent Group Ltd (NYSE:ESNT), and Valley National Bancorp (NYSE:VLY). This group of stocks’ market valuations are closest to CMP’s market valuation.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $88 million. That figure was $74 million in CMP’s case. TCF Financial Corporation (NYSE:TCB) is the most popular stock in this table. On the other hand Kosmos Energy Ltd (NYSE:KOS) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Compass Minerals International, Inc. (NYSE:CMP) is even less popular than KOS. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: none.