U.S. Markets closed

Should You Buy New Gold Inc. (NGD)?

Nina Todic

"Market volatility has picked up again over the past few weeks. Headlines highlight risks regarding interest rates, the Fed, China, house prices, auto sales, trade wars, and more. Uncertainty abounds. But doesn’t it always? I have no view on whether the recent volatility will continue for a while, or whether the market will be back at all-time highs before we know it. I remain focused on preserving and growing our capital, and continue to believe that the best way to do so is via a value-driven, concentrated, patient approach. I shun consensus holdings, rich valuations, and market fads, in favor of solid, yet frequently off-the-beaten-path, businesses run by excellent, aligned management teams, purchased at deep discounts to intrinsic value," are the words of Maran Capital's Dan Roller. His stock picks have been beating the S&P 500 Index handily. 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 New Gold Inc. (NYSEAMEX:NGD) and see how it was affected.

Hedge fund interest in New Gold Inc. (NYSEAMEX:NGD) 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 NGD to other stocks including Dermira Inc (NASDAQ:DERM), Blackrock MuniYield New York Quality Fund, Inc. (NYSE:MYN), and City Office REIT Inc (NYSE:CIO) to get a better sense of its popularity.

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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Andrew Feldstein and Stephen Siderow, Blue Mountain Capital, BlueMountain Capital

Let's review the latest hedge fund action surrounding New Gold Inc. (NYSEAMEX:NGD).

How have hedgies been trading New Gold Inc. (NYSEAMEX:NGD)?

Heading into the fourth quarter of 2018, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, representing no change from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards NGD over the last 13 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

No of Hedge Funds with NGD Positions

When looking at the institutional investors followed by Insider Monkey, David Iben's Kopernik Global Investors has the number one position in New Gold Inc. (NYSEAMEX:NGD), worth close to $28.2 million, corresponding to 5.3% of its total 13F portfolio. Sitting at the No. 2 spot is Saba Capital, managed by Boaz Weinstein, which holds a $5.2 million position; 0.3% of its 13F portfolio is allocated to the stock. Remaining professional money managers that are bullish include Jim Simons's Renaissance Technologies, Eric Sprott's Sprott Asset Management and Andrew Feldstein and Stephen Siderow's Blue Mountain Capital.

Since New Gold Inc. (NYSEAMEX:NGD) has witnessed bearish sentiment from the aggregate hedge fund industry, we can see that there exists a select few money managers who sold off their full holdings by the end of the third quarter. Interestingly, Glenn Russell Dubin's Highbridge Capital Management dumped the largest position of all the hedgies watched by Insider Monkey, comprising an estimated $1.2 million in call options. Philip Hempleman's fund, Ardsley Partners, also said goodbye to its call options, about $0.5 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as New Gold Inc. (NYSE:NGD) but similarly valued. We will take a look at Dermira Inc (NASDAQ:DERM), Blackrock MuniYield New York Qu (NYSE:MYN), City Office REIT Inc (NYSE:CIO), and ZIOPHARM Oncology Inc. (NASDAQ:ZIOP). This group of stocks' market valuations resemble NGD's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DERM,17,88394,0 MYN,2,2216,-1 CIO,6,28732,-1 ZIOP,6,13475,2 Average,7.75,33204,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $33 million. That figure was $48 million in NGD's case. Dermira Inc (NASDAQ:DERM) is the most popular stock in this table. On the other hand Blackrock MuniYield New York Qu (NYSE:MYN) is the least popular one with only 2 bullish hedge fund positions. New Gold Inc. (NYSE:NGD) 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. In this regard DERM might be a better candidate to consider a long position.

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

Related Content