We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 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.
Is Natural Resource Partners LP (NYSE:NRP) ready to rally soon? The smart money is reducing their bets on the stock. The number of long hedge fund bets fell by 1 lately. Our calculations also showed that NRP 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_338854" align="aligncenter" width="2480"] Steven Tananbaum of GoldenTree Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. 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 already gained 20 percent. With all of this in mind we're going to analyze the recent hedge fund action surrounding Natural Resource Partners LP (NYSE:NRP).
Hedge fund activity in Natural Resource Partners LP (NYSE:NRP)
At the end of the third quarter, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from one quarter earlier. By comparison, 5 hedge funds held shares or bullish call options in NRP a year ago. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
The largest stake in Natural Resource Partners LP (NYSE:NRP) was held by GoldenTree Asset Management, which reported holding $14.2 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $1.6 million position. Other investors bullish on the company included Renaissance Technologies, Citadel Investment Group, and Marshall Wace. In terms of the portfolio weights assigned to each position GoldenTree Asset Management allocated the biggest weight to Natural Resource Partners LP (NYSE:NRP), around 2.06% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, setting aside 0.0037 percent of its 13F equity portfolio to NRP.
Judging by the fact that Natural Resource Partners LP (NYSE:NRP) has witnessed a decline in interest from the entirety of the hedge funds we track, it's easy to see that there was a specific group of funds that decided to sell off their full holdings by the end of the third quarter. Interestingly, Matthew Hulsizer's PEAK6 Capital Management sold off the largest position of the "upper crust" of funds watched by Insider Monkey, totaling close to $0.3 million in call options. Matthew Hulsizer's fund, PEAK6 Capital Management, also cut its call options, about $0.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 1 funds by the end of the third quarter.
Let's now review hedge fund activity in other stocks similar to Natural Resource Partners LP (NYSE:NRP). These stocks are CEL-SCI Corporation (NYSEAMERICAN:CVM), Source Capital, Inc. (NYSE:SOR), Zynex, Inc. (NASDAQ:ZYXI), and Gritstone Oncology, Inc. (NASDAQ:GRTS). This group of stocks' market caps are closest to NRP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVM,5,1807,3 SOR,2,8353,0 ZYXI,7,6867,3 GRTS,8,67140,0 Average,5.5,21042,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.5 hedge funds with bullish positions and the average amount invested in these stocks was $21 million. That figure was $17 million in NRP's case. Gritstone Oncology, Inc. (NASDAQ:GRTS) is the most popular stock in this table. On the other hand Source Capital, Inc. (NYSE:SOR) is the least popular one with only 2 bullish hedge fund positions. Natural Resource Partners LP (NYSE:NRP) 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 NRP wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); NRP investors were disappointed as the stock returned -20% 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.