Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Alliance Resource Partners, L.P. (NASDAQ:ARLP) to find out whether it was one of their high conviction long-term ideas.
Alliance Resource Partners, L.P. (NASDAQ:ARLP) has seen a decrease in activity from the world's largest hedge funds recently. 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 below for Q2 rankings). Video: Click the image to 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 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 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.
[caption id="attachment_193003" align="alignnone" width="600"] Chuck Royce of Royce & Associates[/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. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the key hedge fund action regarding Alliance Resource Partners, L.P. (NASDAQ:ARLP).
What does smart money think about Alliance Resource Partners, L.P. (NASDAQ:ARLP)?
At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ARLP over the last 17 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
The largest stake in Alliance Resource Partners, L.P. (NASDAQ:ARLP) was held by Magnolia Capital Fund, which reported holding $48.7 million worth of stock at the end of September. It was followed by Royce & Associates with a $17.9 million position. Other investors bullish on the company included Mountain Lake Investment Management, Arrowstreet Capital, and Prescott Group Capital Management. In terms of the portfolio weights assigned to each position Mountain Lake Investment Management allocated the biggest weight to Alliance Resource Partners, L.P. (NASDAQ:ARLP), around 7.49% of its 13F portfolio. Magnolia Capital Fund is also relatively very bullish on the stock, earmarking 5.45 percent of its 13F equity portfolio to ARLP.
Due to the fact that Alliance Resource Partners, L.P. (NASDAQ:ARLP) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of hedgies that decided to sell off their full holdings heading into Q4. It's worth mentioning that Renaissance Technologies dropped the largest investment of all the hedgies tracked by Insider Monkey, worth an estimated $4.5 million in stock, and Ryan Caldwell's Chiron Investment Management was right behind this move, as the fund sold off about $0.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds heading into Q4.
Let's also examine 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 Corrections Corp Of America (NYSE:CXW), 8x8, Inc. (NASDAQ:EGHT), Endava plc (NYSE:DAVA), and Tower Semiconductor Ltd. (NASDAQ:TSEM). All of these stocks' market caps resemble ARLP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CXW,17,173840,3 EGHT,22,452982,2 DAVA,5,44044,-3 TSEM,13,289098,2 Average,14.25,239991,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $240 million. That figure was $90 million in ARLP's case. 8x8, Inc. (NASDAQ:EGHT) is the most popular stock in this table. On the other hand Endava plc (NYSE:DAVA) is the least popular one with only 5 bullish hedge fund positions. Alliance Resource Partners, L.P. (NASDAQ:ARLP) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ARLP wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ARLP investors were disappointed as the stock returned -31.5% during the first two months of the fourth quarter and underperformed 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.