Should I Avoid PHX Minerals Inc. (PHX)?

Is PHX Minerals Inc. (NYSE:PHX) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

PHX Minerals Inc. (NYSE:PHX) investors should pay attention to a decrease in activity from the world’s largest hedge funds recently. PHX Minerals Inc. (NYSE:PHX) was in 5 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 11. There were 6 hedge funds in our database with PHX positions at the end of the fourth quarter. Our calculations also showed that PHX isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

David Siegel of Two Sigma Advisors

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $27 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we’re going to take a look at the recent hedge fund action regarding PHX Minerals Inc. (NYSE:PHX).

Do Hedge Funds Think PHX Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PHX over the last 23 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

Among these funds, Trigran Investments held the most valuable stake in PHX Minerals Inc. (NYSE:PHX), which was worth $6.2 million at the end of the fourth quarter. On the second spot was Renaissance Technologies which amassed $0.3 million worth of shares. Citadel Investment Group, Two Sigma Advisors, 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 Trigran Investments allocated the biggest weight to PHX Minerals Inc. (NYSE:PHX), around 0.77% of its 13F portfolio. Engineers Gate Manager is also relatively very bullish on the stock, designating 0.0015 percent of its 13F equity portfolio to PHX.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Winton Capital Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified PHX as a viable investment and initiated a position in the stock.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as PHX Minerals Inc. (NYSE:PHX) but similarly valued. We will take a look at TESSCO Technologies, Inc. (NASDAQ:TESS), Biomerica, Inc. (NASDAQ:BMRA), EZGO Technologies Ltd. (NASDAQ:EZGO), NXT-ID Inc. (NASDAQ:NXTD), Ocuphire Pharma, Inc. (NASDAQ:OCUP), Monaker Group, Inc. (NASDAQ:MKGI), and Genetic Technologies Limited (NASDAQ:GENE). This group of stocks’ market valuations resemble PHX’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 1.9 hedge funds with bullish positions and the average amount invested in these stocks was $1 million. That figure was $7 million in PHX’s case. Ocuphire Pharma, Inc. (NASDAQ:OCUP) is the most popular stock in this table. On the other hand Biomerica, Inc. (NASDAQ:BMRA) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks PHX Minerals Inc. (NYSE:PHX) is more popular among hedge funds. Our overall hedge fund sentiment score for PHX is 67.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks returned 17.4% in 2021 through June 18th but still managed to beat the market by 6.1 percentage points. Hedge funds were also right about betting on PHX as the stock returned 17.5% since the end of March (through 6/18) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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