We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by 14.5 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Arch Coal, Inc. (NYSE:ARCH) a sound investment right now? The smart money is turning less bullish. The number of bullish hedge fund positions went down by 1 lately. Our calculations also showed that ARCH isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). ARCH was in 26 hedge funds' portfolios at the end of the third quarter of 2019. There were 27 hedge funds in our database with ARCH positions at the end of the previous quarter.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_728376" align="alignnone" width="1613"] Jonathan Barrett of Luminus Management[/caption]
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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind we're going to view the fresh hedge fund action regarding Arch Coal, Inc. (NYSE:ARCH).
How are hedge funds trading Arch Coal, Inc. (NYSE:ARCH)?
Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the second quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in ARCH a year ago. With the smart money's capital changing hands, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Luminus Management, managed by Jonathan Barrett and Paul Segal, holds the biggest position in Arch Coal, Inc. (NYSE:ARCH). Luminus Management has a $83.2 million position in the stock, comprising 2.4% of its 13F portfolio. Sitting at the No. 2 spot is Monarch Alternative Capital, led by Michael Weinstock, holding a $73.2 million position; 6.4% of its 13F portfolio is allocated to the stock. Some other professional money managers with similar optimism contain James Dondero's Highland Capital Management, Charles Paquelet's Skylands Capital and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Monarch Alternative Capital allocated the biggest weight to Arch Coal, Inc. (NYSE:ARCH), around 6.39% of its 13F portfolio. Skylands Capital is also relatively very bullish on the stock, earmarking 3.82 percent of its 13F equity portfolio to ARCH.
Seeing as Arch Coal, Inc. (NYSE:ARCH) has witnessed bearish sentiment from hedge fund managers, logic holds that there is a sect of hedgies who were dropping their positions entirely in the third quarter. Intriguingly, Dmitry Balyasny's Balyasny Asset Management said goodbye to the largest position of the "upper crust" of funds monitored by Insider Monkey, worth about $1.6 million in stock. Alec Litowitz and Ross Laser's fund, Magnetar Capital, also dropped its stock, about $1 million worth. These moves are important to note, as total hedge fund interest dropped by 1 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Arch Coal, Inc. (NYSE:ARCH). These stocks are MSG Networks Inc (NYSE:MSGN), Bright Scholar Education Holdings Limited (NYSE:BEDU), Raven Industries, Inc. (NASDAQ:RAVN), and RPC, Inc. (NYSE:RES). All of these stocks' market caps are similar to ARCH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MSGN,31,267648,8 BEDU,9,116217,0 RAVN,11,92626,-1 RES,12,66333,-4 Average,15.75,135706,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $136 million. That figure was $299 million in ARCH's case. MSG Networks Inc (NYSE:MSGN) is the most popular stock in this table. On the other hand Bright Scholar Education Holdings Limited (NYSE:BEDU) is the least popular one with only 9 bullish hedge fund positions. Arch Coal, Inc. (NYSE:ARCH) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately ARCH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ARCH were disappointed as the stock returned -11.6% in 2019 and trailed 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.