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How Did Apache Corporation (APA) Compare Against Hedge Fund Darlings in 2019?

Asma UL Husna

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57%. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 41.3% in 2019 and outperformed the broader market benchmark by 10.1 percentage points. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Apache Corporation (NYSE:APA) was in 26 hedge funds' portfolios at the end of September. APA shareholders have witnessed an increase in hedge fund sentiment in recent months. There were 22 hedge funds in our database with APA positions at the end of the previous quarter. Our calculations also showed that APA 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).

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_673253" align="aligncenter" width="473"] Jeffrey Talpins of Element Capital[/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. Now we're going to check out the fresh hedge fund action regarding Apache Corporation (NYSE:APA).

How are hedge funds trading Apache Corporation (NYSE:APA)?

At the end of the third quarter, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 18% from the previous quarter. On the other hand, there were a total of 26 hedge funds with a bullish position in APA a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Orbis Investment Management was the largest shareholder of Apache Corporation (NYSE:APA), with a stake worth $335.9 million reported as of the end of September. Trailing Orbis Investment Management was Citadel Investment Group, which amassed a stake valued at $171.2 million. Alyeska Investment Group, Balyasny Asset Management, and Two Sigma Advisors 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 Elm Ridge Capital allocated the biggest weight to Apache Corporation (NYSE:APA), around 3.77% of its 13F portfolio. Orbis Investment Management is also relatively very bullish on the stock, designating 2.48 percent of its 13F equity portfolio to APA.

Consequently, key hedge funds were leading the bulls' herd. Alyeska Investment Group, managed by Anand Parekh, assembled the largest position in Apache Corporation (NYSE:APA). Alyeska Investment Group had $24.1 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also initiated a $23.4 million position during the quarter. The other funds with brand new APA positions are Israel Englander's Millennium Management, Matt Smith's Deep Basin Capital, and Jeffrey Talpins's Element Capital Management.

Let's also examine hedge fund activity in other stocks similar to Apache Corporation (NYSE:APA). We will take a look at United Rentals, Inc. (NYSE:URI), Formula One Group (NASDAQ:FWONK), Avery Dennison Corporation (NYSE:AVY), and Vereit Inc (NYSE:VER). This group of stocks' market values are closest to APA's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position URI,54,1123521,10 FWONK,30,1915502,-2 AVY,22,125790,1 VER,34,613230,11 Average,35,944511,5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35 hedge funds with bullish positions and the average amount invested in these stocks was $945 million. That figure was $693 million in APA's case. United Rentals, Inc. (NYSE:URI) is the most popular stock in this table. On the other hand Avery Dennison Corporation (NYSE:AVY) is the least popular one with only 22 bullish hedge fund positions. Apache Corporation (NYSE:APA) 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. 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 APA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); APA investors were disappointed as the stock returned 1.1% 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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