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Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter of 2018. Trends reversed 180 degrees in 2019 amid Powell's pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the third quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Advanced Emissions Solutions, Inc. (NASDAQ:ADES).
Hedge fund interest in Advanced Emissions Solutions, Inc. (NASDAQ:ADES) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare ADES to other stocks including Preformed Line Products Company (NASDAQ:PLPC), Central Valley Community Bancorp (NASDAQ:CVCY), and BayCom Corp (NASDAQ:BCML) to get a better sense of its popularity.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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Michael Price of MFP Investors[/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. 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 take a look at the recent hedge fund action encompassing Advanced Emissions Solutions, Inc. (NASDAQ:ADES).
Hedge fund activity in Advanced Emissions Solutions, Inc. (NASDAQ:ADES)
Heading into the fourth quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in ADES over the last 17 quarters. With hedge funds' sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, Alta Fundamental Advisers was the largest shareholder of Advanced Emissions Solutions, Inc. (NASDAQ:ADES), with a stake worth $23.4 million reported as of the end of September. Trailing Alta Fundamental Advisers was MFP Investors, which amassed a stake valued at $11.9 million. Arrowstreet Capital, Two Sigma Advisors, and Marshall Wace 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 Alta Fundamental Advisers allocated the biggest weight to Advanced Emissions Solutions, Inc. (NASDAQ:ADES), around 15.63% of its 13F portfolio. MFP Investors is also relatively very bullish on the stock, dishing out 1.64 percent of its 13F equity portfolio to ADES.
Due to the fact that Advanced Emissions Solutions, Inc. (NASDAQ:ADES) has witnessed declining sentiment from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedge funds that elected to cut their full holdings heading into Q4. At the top of the heap, Jonathan Savitz's Greywolf Capital Management dropped the biggest stake of the "upper crust" of funds watched by Insider Monkey, totaling close to $3 million in stock, and Bruce Kovner's Caxton Associates was right behind this move, as the fund cut about $0.2 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Advanced Emissions Solutions, Inc. (NASDAQ:ADES) but similarly valued. These stocks are Preformed Line Products Company (NASDAQ:PLPC), Central Valley Community Bancorp (NASDAQ:CVCY), BayCom Corp (NASDAQ:BCML), and SEACOR Marine Holdings Inc. (NYSE:SMHI). All of these stocks' market caps are similar to ADES's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PLPC,5,30118,0 CVCY,3,16452,0 BCML,5,25945,1 SMHI,6,27404,-1 Average,4.75,24980,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.75 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $42 million in ADES's case. SEACOR Marine Holdings Inc. (NYSE:SMHI) is the most popular stock in this table. On the other hand Central Valley Community Bancorp (NASDAQ:CVCY) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Advanced Emissions Solutions, Inc. (NASDAQ:ADES) 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 ADES wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ADES were disappointed as the stock returned -29.9% 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.