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Hedge Funds Have Never Been Less Bullish On Archrock, Inc. (AROC)

Nina Todic

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 20% in 2019 (through September 30th). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of 24% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Archrock, Inc. (NYSE:AROC).

Is Archrock, Inc. (NYSE:AROC) a healthy stock for your portfolio? Money managers are in a bearish mood. The number of bullish hedge fund bets fell by 8 in recent months. Our calculations also showed that AROC 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.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Marshall Marshall Wace

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 new hedge fund action surrounding Archrock, Inc. (NYSE:AROC).

How have hedgies been trading Archrock, Inc. (NYSE:AROC)?

At the end of the second quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -50% from the first quarter of 2019. On the other hand, there were a total of 16 hedge funds with a bullish position in AROC 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.

No of Hedge Funds with AROC Positions

Among these funds, Royce & Associates held the most valuable stake in Archrock, Inc. (NYSE:AROC), which was worth $6.9 million at the end of the second quarter. On the second spot was Millennium Management which amassed $4.1 million worth of shares. Moreover, D E Shaw, Marshall Wace LLP, and Renaissance Technologies were also bullish on Archrock, Inc. (NYSE:AROC), allocating a large percentage of their portfolios to this stock.

Since Archrock, Inc. (NYSE:AROC) has witnessed declining sentiment from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of hedge funds who sold off their full holdings by the end of the second quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital said goodbye to the biggest stake of the 750 funds watched by Insider Monkey, worth an estimated $7.1 million in stock, and Andrew Feldstein and Stephen Siderow's Blue Mountain Capital was right behind this move, as the fund dropped about $0.7 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 8 funds by the end of the second quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Archrock, Inc. (NYSE:AROC) but similarly valued. We will take a look at STAAR Surgical Company (NASDAQ:STAA), LendingClub Corporation (NYSE:LC), AeroVironment, Inc. (NASDAQ:AVAV), and Masonite International Corporation (NYSE:DOOR). This group of stocks' market values are similar to AROC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STAA,16,556099,-5 LC,10,4343,-1 AVAV,12,38843,-1 DOOR,19,281379,-2 Average,14.25,220166,-2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $220 million. That figure was $23 million in AROC's case. Masonite International Corporation (NYSE:DOOR) is the most popular stock in this table. On the other hand LendingClub Corporation (NYSE:LC) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Archrock, Inc. (NYSE:AROC) is even less popular than LC. Hedge funds dodged a bullet by taking a bearish stance towards AROC. 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 AROC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AROC investors were disappointed as the stock returned -4.5% 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.

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