Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors’ favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds’ top consensus picks. This year hedge funds’ top 20 stock picks outperformed the S&P 500 Index by 9.9 percentage points through the end of November. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
Extraction Oil & Gas, Inc. (NASDAQ:XOG) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 17 hedge funds’ portfolios at the end of September. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Global Medical REIT Inc. (NYSE:GMRE), El Pollo LoCo Holdings Inc (NASDAQ:LOCO), and Hibbett Sports, Inc. (NASDAQ:HIBB) to gather more data points. Our calculations also showed that XOG 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’ 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.
Jonathan Barrett of Luminus Management
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 check out the new hedge fund action encompassing Extraction Oil & Gas, Inc. (NASDAQ:XOG).
What does smart money think about Extraction Oil & Gas, Inc. (NASDAQ:XOG)?
At Q3’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in XOG 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.
More specifically, Luminus Management was the largest shareholder of Extraction Oil & Gas, Inc. (NASDAQ:XOG), with a stake worth $39.6 million reported as of the end of September. Trailing Luminus Management was Beach Point Capital Management, which amassed a stake valued at $6 million. Point72 Asset Management, Rubric Capital Management, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Beach Point Capital Management allocated the biggest weight to Extraction Oil & Gas, Inc. (NASDAQ:XOG), around 2.29% of its 13F portfolio. Luminus Management is also relatively very bullish on the stock, earmarking 1.15 percent of its 13F equity portfolio to XOG.
Judging by the fact that Extraction Oil & Gas, Inc. (NASDAQ:XOG) has witnessed a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there exists a select few hedge funds who sold off their full holdings heading into Q4. It’s worth mentioning that Lee Ainslie’s Maverick Capital said goodbye to the biggest position of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $5.8 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund said goodbye to about $4.9 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Extraction Oil & Gas, Inc. (NASDAQ:XOG) but similarly valued. These stocks are Global Medical REIT Inc. (NYSE:GMRE), El Pollo LoCo Holdings Inc (NASDAQ:LOCO), Hibbett Sports, Inc. (NASDAQ:HIBB), and Unifi, Inc. (NYSE:UFI). All of these stocks’ market caps are closest to XOG’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GMRE | 8 | 15835 | -5 |
| LOCO | 10 | 9183 | -1 |
| HIBB | 14 | 80882 | -1 |
| UFI | 15 | 88362 | 3 |
| Average | 11.75 | 48566 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $49 million. That figure was $58 million in XOG’s case. Unifi, Inc. (NYSE:UFI) is the most popular stock in this table. On the other hand Global Medical REIT Inc. (NYSE:GMRE) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Extraction Oil & Gas, Inc. (NASDAQ:XOG) is more popular among hedge funds. 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 XOG wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on XOG were disappointed as the stock returned -51% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
