In this article we are going to use hedge fund sentiment as a tool and determine whether Callon Petroleum Company (NYSE:CPE) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is Callon Petroleum Company (NYSE:CPE) ready to rally soon? Hedge funds were in a pessimistic mood. The number of long hedge fund bets went down by 16 in recent months. Callon Petroleum Company (NYSE:CPE) was in 4 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 38. Our calculations also showed that CPE isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 20 hedge funds in our database with CPE positions at the end of the second quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 113% since March 2017 and outperformed the S&P 500 ETFs by more than 66 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Peter Rathjens of Arrowstreet Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Keeping this in mind let's take a gander at the key hedge fund action encompassing Callon Petroleum Company (NYSE:CPE).
What does smart money think about Callon Petroleum Company (NYSE:CPE)?
At the end of September, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -80% from the second quarter of 2020. On the other hand, there were a total of 29 hedge funds with a bullish position in CPE a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital has the number one position in Callon Petroleum Company (NYSE:CPE), worth close to $4.8 million, accounting for less than 0.1%% of its total 13F portfolio. On Arrowstreet Capital's heels is D E Shaw, managed by D. E. Shaw, which holds a $2.7 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining professional money managers that are bullish encompass Israel Englander's Millennium Management, Ken Griffin's Citadel Investment Group and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Arrowstreet Capital allocated the biggest weight to Callon Petroleum Company (NYSE:CPE), around 0.01% of its 13F portfolio. D E Shaw is also relatively very bullish on the stock, earmarking 0.0027 percent of its 13F equity portfolio to CPE.
Because Callon Petroleum Company (NYSE:CPE) has witnessed declining sentiment from hedge fund managers, we can see that there lies a certain "tier" of fund managers that decided to sell off their positions entirely last quarter. It's worth mentioning that Donald Sussman's Paloma Partners cut the biggest position of all the hedgies watched by Insider Monkey, worth an estimated $2.6 million in stock. Nick Thakore's fund, Diametric Capital, also dumped its stock, about $0.4 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 16 funds last quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Callon Petroleum Company (NYSE:CPE) but similarly valued. We will take a look at RGC Resources, Inc. (NASDAQ:RGCO), MVB Financial Corp. (NASDAQ:MVBF), General Finance Corporation (NASDAQ:GFN), Atlanticus Holdings Corp (NASDAQ:ATLC), Great Ajax Corp (NYSE:AJX), North American Construction Group Ltd. (NYSE:NOA), and CASI Pharmaceuticals Inc (NASDAQ:CASI). All of these stocks' market caps are similar to CPE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RGCO,1,1916,-1 MVBF,3,22290,-2 GFN,3,7753,-1 ATLC,2,5259,0 AJX,5,13167,-1 NOA,9,23376,0 CASI,10,15008,4 Average,4.7,12681,-0.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.7 hedge funds with bullish positions and the average amount invested in these stocks was $13 million. That figure was $9 million in CPE's case. CASI Pharmaceuticals Inc (NASDAQ:CASI) is the most popular stock in this table. On the other hand RGC Resources, Inc. (NASDAQ:RGCO) is the least popular one with only 1 bullish hedge fund positions. Callon Petroleum Company (NYSE:CPE) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CPE is 8.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. A small number of hedge funds were also right about betting on CPE as the stock returned 116% since the end of the third quarter (through 11/27) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.