Should You Avoid Archrock, Inc. (AROC)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Archrock, Inc. (NYSE:AROC) and determine whether the smart money was really smart about this stock.

Is Archrock, Inc. (NYSE:AROC) a buy right now? The best stock pickers were reducing their bets on the stock. The number of long hedge fund bets dropped by 4 recently. Our calculations also showed that AROC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). AROC was in 11 hedge funds’ portfolios at the end of March. There were 15 hedge funds in our database with AROC positions at the end of the previous quarter.

Video: 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a gander at the recent hedge fund action surrounding Archrock, Inc. (NYSE:AROC).

How have hedgies been trading Archrock, Inc. (NYSE:AROC)?

At Q1’s end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -27% from one quarter earlier. On the other hand, there were a total of 16 hedge funds with a bullish position in AROC a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

More specifically, Arrowstreet Capital was the largest shareholder of Archrock, Inc. (NYSE:AROC), with a stake worth $5.1 million reported as of the end of September. Trailing Arrowstreet Capital was Royce & Associates, which amassed a stake valued at $3.5 million. Millennium Management, Cyrus Capital Partners, and Two Sigma Advisors 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 Cyrus Capital Partners allocated the biggest weight to Archrock, Inc. (NYSE:AROC), around 0.7% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, dishing out 0.05 percent of its 13F equity portfolio to AROC.

Because Archrock, Inc. (NYSE:AROC) has faced falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of fund managers that slashed their entire stakes heading into Q4. Interestingly, Mika Toikka’s AlphaCrest Capital Management dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $0.4 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund cut about $0.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Archrock, Inc. (NYSE:AROC). These stocks are Blucora Inc (NASDAQ:BCOR), Genfit SA (NASDAQ:GNFT), Great Southern Bancorp, Inc. (NASDAQ:GSBC), and Precigen, Inc. (NYSE:PGEN). All of these stocks’ market caps match AROC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $34 million. That figure was $14 million in AROC’s case. Blucora Inc (NASDAQ:BCOR) is the most popular stock in this table. On the other hand Genfit SA (NASDAQ:GNFT) is the least popular one with only 2 bullish hedge fund positions. Archrock, Inc. (NYSE:AROC) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on AROC as the stock returned 78.4% during the second quarter and outperformed the market by an even larger margin.

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