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In this article we will take a look at whether hedge funds think Alliance Resource Partners, L.P. (NASDAQ:ARLP) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.
Alliance Resource Partners, L.P. (NASDAQ:ARLP) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 4 hedge funds' portfolios at the end of the third quarter of 2020. Our calculations also showed that ARLP isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Dynex Capital Inc (NYSE:DX), MRC Global Inc (NYSE:MRC), and MEI Pharma Inc (NASDAQ:MEIP) to gather more data points.
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 66 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.
Ken Griffin of Citadel Investment Group
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we're going to review the key hedge fund action surrounding Alliance Resource Partners, L.P. (NASDAQ:ARLP).
What does smart money think about Alliance Resource Partners, L.P. (NASDAQ:ARLP)?
At Q3's end, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 7 hedge funds with a bullish position in ARLP a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Adam Peterson's Magnolia Capital Fund has the biggest position in Alliance Resource Partners, L.P. (NASDAQ:ARLP), worth close to $14.1 million, comprising 2.1% of its total 13F portfolio. The second largest stake is held by Mountain Lake Investment Management, managed by Mitch Cantor, which holds a $2.4 million position; the fund has 1.6% of its 13F portfolio invested in the stock. Other professional money managers that are bullish comprise Phil Frohlich's Prescott Group Capital Management, and Jonathan Soros's JS Capital. In terms of the portfolio weights assigned to each position Magnolia Capital Fund allocated the biggest weight to Alliance Resource Partners, L.P. (NASDAQ:ARLP), around 2.05% of its 13F portfolio. Mountain Lake Investment Management is also relatively very bullish on the stock, designating 1.61 percent of its 13F equity portfolio to ARLP.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was JS Capital).
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Alliance Resource Partners, L.P. (NASDAQ:ARLP) but similarly valued. These stocks are Dynex Capital Inc (NYSE:DX), MRC Global Inc (NYSE:MRC), MEI Pharma Inc (NASDAQ:MEIP), AC Immune SA (NASDAQ:ACIU), MBIA Inc. (NYSE:MBI), Oceaneering International (NYSE:OII), and Miller Industries, Inc. (NYSE:MLR). This group of stocks' market values resemble ARLP's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DX,8,7739,4 MRC,18,26533,0 MEIP,16,59453,-4 ACIU,11,61021,1 MBI,16,65059,0 OII,18,30144,1 MLR,11,55092,1 Average,14,43577,0.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $44 million. That figure was $17 million in ARLP's case. MRC Global Inc (NYSE:MRC) is the most popular stock in this table. On the other hand Dynex Capital Inc (NYSE:DX) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Alliance Resource Partners, L.P. (NASDAQ:ARLP) is even less popular than DX. Our overall hedge fund sentiment score for ARLP is 18.3. 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. Hedge funds clearly dropped the ball on ARLP as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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 percentage points. These stocks gained 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. A small number of hedge funds were also right about betting on ARLP as the stock returned 67.5% since Q3 (through November 27th) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.