Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Talos Energy, Inc. (NYSE:TALO).
Is Talos Energy, Inc. (NYSE:TALO) a bargain? Hedge funds are becoming hopeful. The number of bullish hedge fund positions moved up by 4 lately. Our calculations also showed that talo isn't among the 30 most popular stocks among hedge funds.
According to most market participants, hedge funds are seen as underperforming, outdated investment tools of years past. While there are over 8000 funds in operation at present, Our researchers choose to focus on the upper echelon of this group, about 750 funds. It is estimated that this group of investors administer the lion's share of the smart money's total asset base, and by shadowing their matchless equity investments, Insider Monkey has unearthed many investment strategies that have historically outperformed Mr. Market. Insider Monkey's flagship hedge fund strategy defeated the S&P 500 index by around 5 percentage points per year since its inception in May 2014 through June 18th. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 28.2% since February 2017 (through June 18th) even though the market was up nearly 30% during the same period. We just shared a list of 5 short targets in our latest quarterly update and they are already down an average of 8.2% in a month whereas our long picks outperformed the market by 2.5 percentage points in this volatile 5 week period (our long picks also beat the market by 15 percentage points so far this year).
Let's take a look at the recent hedge fund action regarding Talos Energy, Inc. (NYSE:TALO).
What have hedge funds been doing with Talos Energy, Inc. (NYSE:TALO)?
At Q1's end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 31% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TALO over the last 15 quarters. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Todd J. Kantor's Encompass Capital Advisors has the most valuable position in Talos Energy, Inc. (NYSE:TALO), worth close to $49.5 million, accounting for 3.7% of its total 13F portfolio. The second largest stake is held by Royce & Associates, managed by Chuck Royce, which holds a $16.9 million position; 0.1% of its 13F portfolio is allocated to the company. Some other members of the smart money with similar optimism contain Jim Simons's Renaissance Technologies, Israel Englander's Millennium Management and Ken Griffin's Citadel Investment Group.
Consequently, some big names were leading the bulls' herd. Citadel Investment Group, managed by Ken Griffin, assembled the most outsized call position in Talos Energy, Inc. (NYSE:TALO). Citadel Investment Group had $1.4 million invested in the company at the end of the quarter. Louis Bacon's Moore Global Investments also initiated a $1.2 million position during the quarter. The other funds with brand new TALO positions are Arvind Sanger's GeoSphere Capital Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, and Noam Gottesman's GLG Partners.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Talos Energy, Inc. (NYSE:TALO) but similarly valued. These stocks are Evoqua Water Technologies Corp. (NYSE:AQUA), Sleep Number Corporation (NASDAQ:SNBR), Noble Midstream Partners LP (NYSE:NBLX), and MOGU Inc. (NYSE:MOGU). This group of stocks' market valuations are similar to TALO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AQUA,13,105564,1 SNBR,20,192016,2 NBLX,4,7623,-2 MOGU,1,440,-1 Average,9.5,76411,0 [/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 $76 million. That figure was $93 million in TALO's case. Sleep Number Corporation (NASDAQ:SNBR) is the most popular stock in this table. On the other hand MOGU Inc. (NYSE:MOGU) is the least popular one with only 1 bullish hedge fund positions. Talos Energy, Inc. (NYSE:TALO) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately TALO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on TALO were disappointed as the stock returned -15.5% during the same period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.