“October lived up to its scary reputation—the S&P 500 falling in the month by the largest amount in the last 40 years, the only worse Octobers being ’08 and the Crash of ’87. For perspective, there have been only 5 occasions in those 40 years when the S&P 500 declined by greater than 20% from peak to trough. Other than the ’87 Crash, all were during recessions. There were 17 other instances, over the same time frame, when the market fell by over 10% but less than 20%. Furthermore, this is the 18th correction of 5% or more since the current bull market started in March ’09. Corrections are the norm. They can be healthy as they often undo market complacency—overbought levels—potentially allowing the market to base and move even higher.” This is how Trapeze Asset Management summarized the recent market moves in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.
Trecora Resources (NYSE:TREC) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 6 hedge funds’ portfolios at the end of September. At the end of this article we will also compare TREC to other stocks including America First Multifamily Investors, L.P. (NASDAQ:ATAX), Diebold Nixdorf Incorporated (NYSE:DBD), and MagnaChip Semiconductor Corporation (NYSE:MX) to get a better sense of its popularity.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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.
We’re going to view the new hedge fund action encompassing Trecora Resources (NYSE:TREC).
What does the smart money think about Trecora Resources (NYSE:TREC)?
At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, representing no change from one quarter earlier. By comparison, 7 hedge funds held shares or bullish call options in TREC heading into this year. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Royce & Associates held the most valuable stake in Trecora Resources (NYSE:TREC), which was worth $7.2 million at the end of the third quarter. On the second spot was Brigade Capital which amassed $7.2 million worth of shares. Moreover, Rutabaga Capital Management, Renaissance Technologies, and Wynnefield Capital were also bullish on Trecora Resources (NYSE:TREC), allocating a large percentage of their portfolios to this stock.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s now review hedge fund activity in other stocks similar to Trecora Resources (NYSE:TREC). These stocks are America First Multifamily Investors, L.P. (NASDAQ:ATAX), Diebold Nixdorf Incorporated (NYSE:DBD), MagnaChip Semiconductor Corporation (NYSE:MX), and Oxford Lane Capital Corp. (NASDAQ:OXLC). All of these stocks’ market caps are closest to TREC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ATAX | 1 | 1218 | 0 |
| DBD | 15 | 102526 | 3 |
| MX | 20 | 151076 | -4 |
| OXLC | 2 | 4566 | 1 |
| Average | 9.5 | 64847 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $65 million. That figure was $23 million in TREC’s case. MagnaChip Semiconductor Corporation (NYSE:MX) is the most popular stock in this table. On the other hand America First Multifamily Investors, L.P. (NASDAQ:ATAX) is the least popular one with only 1 bullish hedge fund positions. Trecora Resources (NYSE:TREC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard MX might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
