U.S. Markets closed

Hedge Funds Are Dumping Warrior Met Coal, Inc. (HCC)

Abigail Fisher

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.

Warrior Met Coal, Inc. (NYSE:HCC) investors should pay attention to a decrease in enthusiasm from smart money lately. HCC was in 27 hedge funds' portfolios at the end of September. There were 31 hedge funds in our database with HCC holdings at the end of the previous quarter. Our calculations also showed that HCC 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.

5 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 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. 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.

[caption id="attachment_338854" align="aligncenter" width="500"] Steven Tananbaum of GoldenTree Asset Management[/caption]

Steven Tananbaum - GoldenTree Asset Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a glance at the fresh hedge fund action regarding Warrior Met Coal, Inc.(NYSE:HCC).

Hedge fund activity in Warrior Met Coal, Inc. (NYSE:HCC)

At Q3's end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HCC over the last 17 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

HCC_dec2019

More specifically, Renaissance Technologies was the largest shareholder of Warrior Met Coal, Inc. (NYSE:HCC), with a stake worth $38.1 million reported as of the end of September. Trailing Renaissance Technologies was Third Avenue Management, which amassed a stake valued at $34.5 million. Luminus Management, AQR Capital Management, and Citadel Investment Group 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 Third Avenue Management allocated the biggest weight to Warrior Met Coal, Inc. (NYSE:HCC), around 3.12% of its portfolio. GoldenTree Asset Management is also relatively very bullish on the stock, designating 2.06 percent of its 13F equity portfolio to HCC.

Because Warrior Met Coal, Inc. (NYSE:HCC) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of hedgies that decided to sell off their positions entirely heading into Q4. At the top of the heap, Alex Snow's Lansdowne Partners sold off the biggest stake of all the hedgies watched by Insider Monkey, totaling close to $31.4 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund sold off about $27.4 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 4 funds heading into Q4.

Let's also examine hedge fund activity in other stocks similar to Warrior Met Coal, Inc. (NYSE:HCC). These stocks are Silk Road Medical, Inc. (NASDAQ:SILK), Lindsay Corporation (NYSE:LNN), Meridian Bancorp, Inc. (NASDAQ:EBSB), and Primoris Services Corp (NASDAQ:PRIM). This group of stocks' market values resemble HCC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SILK,7,52706,-4 LNN,8,193429,2 EBSB,10,88413,-1 PRIM,13,28390,1 Average,9.5,90735,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $91 million. That figure was $234 million in HCC's case. Primoris Services Corp (NASDAQ:PRIM) is the most popular stock in this table. On the other hand Silk Road Medical, Inc. (NASDAQ:SILK) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Warrior Met Coal, Inc. (NYSE:HCC) is more popular among hedge funds. 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 HCC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on HCC were disappointed as the stock returned 5.4% 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.

Related Content