How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Centennial Resource Development, Inc. (NASDAQ:CDEV) and determine whether hedge funds had an edge regarding this stock.
Is Centennial Resource Development, Inc. (NASDAQ:CDEV) a buy here? The best stock pickers were reducing their bets on the stock. The number of long hedge fund positions were trimmed by 11 recently. Our calculations also showed that CDEV isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).
Video: 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 S&P 500 ETFs by more than 58 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. 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.
Cliff Asness of AQR Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let's view the key hedge fund action surrounding Centennial Resource Development, Inc. (NASDAQ:CDEV).
What have hedge funds been doing with Centennial Resource Development, Inc. (NASDAQ:CDEV)?
Heading into the second quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -38% from one quarter earlier. By comparison, 15 hedge funds held shares or bullish call options in CDEV a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Prescott Group Capital Management held the most valuable stake in Centennial Resource Development, Inc. (NASDAQ:CDEV), which was worth $6.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $4.3 million worth of shares. SailingStone Capital Partners, Renaissance Technologies, and D E Shaw 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 Prescott Group Capital Management allocated the biggest weight to Centennial Resource Development, Inc. (NASDAQ:CDEV), around 3.08% of its 13F portfolio. SailingStone Capital Partners is also relatively very bullish on the stock, designating 0.89 percent of its 13F equity portfolio to CDEV.
Due to the fact that Centennial Resource Development, Inc. (NASDAQ:CDEV) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of hedge funds who were dropping their entire stakes by the end of the first quarter. Interestingly, Anand Parekh's Alyeska Investment Group said goodbye to the biggest stake of all the hedgies tracked by Insider Monkey, totaling about $16.6 million in stock, and Steve Cohen's Point72 Asset Management was right behind this move, as the fund sold off about $8.4 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 11 funds by the end of the first quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Centennial Resource Development, Inc. (NASDAQ:CDEV) but similarly valued. These stocks are Delta Apparel, Inc. (NYSE:DLA), Eton Pharmaceuticals, Inc. (NASDAQ:ETON), Galmed Pharmaceuticals Ltd (NASDAQ:GLMD), and Xeris Pharmaceuticals, Inc. (NASDAQ:XERS). This group of stocks' market caps are similar to CDEV's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DLA,4,4188,-1 ETON,4,18066,2 GLMD,10,18167,0 XERS,10,21986,4 Average,7,15602,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $18 million in CDEV's case. Galmed Pharmaceuticals Ltd (NASDAQ:GLMD) is the most popular stock in this table. On the other hand Delta Apparel, Inc. (NYSE:DLA) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Centennial Resource Development, Inc. (NASDAQ:CDEV) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on CDEV as the stock returned 225.5% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.