We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds' top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. That's a big deal.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Baytex Energy Corp (NYSE:BTE) has seen a decrease in hedge fund sentiment lately. BTE was in 7 hedge funds' portfolios at the end of the second quarter of 2019. There were 10 hedge funds in our database with BTE holdings at the end of the previous quarter. Our calculations also showed that BTE isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the fresh hedge fund action surrounding Baytex Energy Corp (NYSE:BTE).
What does smart money think about Baytex Energy Corp (NYSE:BTE)?
At Q2's end, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -30% from the first quarter of 2019. By comparison, 11 hedge funds held shares or bullish call options in BTE 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, Luminus Management held the most valuable stake in Baytex Energy Corp (NYSE:BTE), which was worth $42.8 million at the end of the second quarter. On the second spot was Royce & Associates which amassed $2.5 million worth of shares. Moreover, Citadel Investment Group, Signition LP, and Water Island Capital were also bullish on Baytex Energy Corp (NYSE:BTE), allocating a large percentage of their portfolios to this stock.
Since Baytex Energy Corp (NYSE:BTE) has experienced declining sentiment from the smart money, we can see that there is a sect of money managers that elected to cut their entire stakes by the end of the second quarter. It's worth mentioning that Peter Muller's PDT Partners dumped the biggest investment of all the hedgies followed by Insider Monkey, totaling an estimated $1 million in stock. John Thiessen's fund, Vertex One Asset Management, also sold off its stock, about $1 million worth. These transactions are important to note, as total hedge fund interest fell by 3 funds by the end of the second quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Baytex Energy Corp (NYSE:BTE) but similarly valued. These stocks are GoPro Inc (NASDAQ:GPRO), Vericel Corp (NASDAQ:VCEL), QAD Inc. (NASDAQ:QADA), and Fluidigm Corporation (NASDAQ:FLDM). All of these stocks' market caps are closest to BTE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GPRO,19,190326,-4 VCEL,17,176656,-8 QADA,11,113256,-5 FLDM,17,137031,-2 Average,16,154317,-4.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $154 million. That figure was $49 million in BTE's case. GoPro Inc (NASDAQ:GPRO) is the most popular stock in this table. On the other hand QAD Inc. (NASDAQ:QADA) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Baytex Energy Corp (NYSE:BTE) is even less popular than QADA. Hedge funds dodged a bullet by taking a bearish stance towards BTE. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately BTE wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); BTE investors were disappointed as the stock returned -3.9% during the third 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.