We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Chesapeake Energy Corporation (NYSE:CHK).
Is Chesapeake Energy Corporation (NYSE:CHK) a bargain? The smart money is buying. The number of bullish hedge fund bets moved up by 3 recently. Our calculations also showed that CHK isn't among the 30 most popular stocks among hedge funds.
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 the 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.
Let's review the new hedge fund action regarding Chesapeake Energy Corporation (NYSE:CHK).
Hedge fund activity in Chesapeake Energy Corporation (NYSE:CHK)
At the end of the third quarter, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the second quarter of 2018. On the other hand, there were a total of 17 hedge funds with a bullish position in CHK at the beginning of this year. With the smart money's capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
Among these funds, AQR Capital Management held the most valuable stake in Chesapeake Energy Corporation (NYSE:CHK), which was worth $73.3 million at the end of the third quarter. On the second spot was Huber Capital Management, which amassed $38.2 million worth of shares. Moreover, Renaissance Technologies, Millennium Management, and Millennium Management were also bullish on Chesapeake Energy Corporation (NYSE:CHK), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, specific money managers have been driving this bullishness. Renaissance Technologies, managed by Jim Simons, created the most outsized position in Chesapeake Energy Corporation (NYSE:CHK). Renaissance Technologies had $35.8 million invested in the company at the end of the quarter. Andrew Feldstein and Stephen Siderow's Blue Mountain Capital also made a $1.8 million investment in the stock during the quarter. The other funds with brand new CHK positions are Noam Gottesman's GLG Partners, D. E. Shaw's D E Shaw, and Dmitry Balyasny's Balyasny Asset Management.
Let's also examine hedge fund activity in other stocks similar to Chesapeake Energy Corporation (NYSE:CHK). We will take a look at Entegris Inc (NASDAQ:ENTG), Intelsat S.A. (NYSE:I), Lancaster Colony Corporation (NASDAQ:LANC), and Valvoline Inc. (NYSE:VVV). This group of stocks' market valuations match CHK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ENTG,25,478841,0 I,37,1128740,14 LANC,16,230249,4 VVV,15,313449,3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $538 million. That figure was $214 million in CHK's case. Intelsat S.A. (NYSE:I) is the most popular stock in this table. On the other hand Valvoline Inc. (NYSE:VVV) is the least popular one with only 15 bullish hedge fund positions. Chesapeake Energy Corporation (NYSE:CHK) 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. In this regard I might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.