U.S. Markets open in 2 hrs 59 mins

Hedge Funds Rushed Into Centennial Resource Development, Inc. (CDEV) Too Early

Reymerlyn Martin

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Centennial Resource Development, Inc. (NASDAQ:CDEV). There is currently one ETF with a significant weight in CDEV: Invesco Dynamic Energy Exploration & Production ETF (NYSE:PXE).

Centennial Resource Development, Inc. (NASDAQ:CDEV) investors should pay attention to an increase in activity from the world's largest hedge funds in recent months. Our calculations also showed that CDEV 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

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_735641" align="aligncenter" width="1613"] Michael Lowenstein of Kensico Capital[/caption]

Michael Lowenstein Kensico Capital

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. Let's take a peek at the new hedge fund action encompassing Centennial Resource Development, Inc. (NASDAQ:CDEV).

What have hedge funds been doing with Centennial Resource Development, Inc. (NASDAQ:CDEV)?

At Q3's end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 65% from the previous quarter. On the other hand, there were a total of 21 hedge funds with a bullish position in CDEV a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

CDEV_dec2019

The largest stake in Centennial Resource Development, Inc. (NASDAQ:CDEV) was held by Citadel Investment Group, which reported holding $42.8 million worth of stock at the end of September. It was followed by Millennium Management with a $37 million position. Other investors bullish on the company included Kensico Capital, AQR Capital Management, and Luminus Management. In terms of the portfolio weights assigned to each position SailingStone Capital Partners allocated the biggest weight to Centennial Resource Development, Inc. (NASDAQ:CDEV), around 3.14% of its portfolio. Covalent Capital Partners is also relatively very bullish on the stock, designating 2.88 percent of its 13F equity portfolio to CDEV.

As aggregate interest increased, key money managers were breaking ground themselves. Luminus Management, managed by Jonathan Barrett and Paul Segal, created the most outsized position in Centennial Resource Development, Inc. (NASDAQ:CDEV). Luminus Management had $20.4 million invested in the company at the end of the quarter. Anand Parekh's Alyeska Investment Group also made a $9.8 million investment in the stock during the quarter. The following funds were also among the new CDEV investors: Matt Smith's Deep Basin Capital, David E. Shaw's D E Shaw, and George McCabe's Portolan Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Centennial Resource Development, Inc. (NASDAQ:CDEV) but similarly valued. We will take a look at Revlon Inc (NYSE:REV), Hawaiian Holdings, Inc. (NASDAQ:HA), Kornit Digital Ltd. (NASDAQ:KRNT), and Arbor Realty Trust, Inc. (NYSE:ABR). This group of stocks' market valuations resemble CDEV's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position REV,33,230252,2 HA,11,82372,0 KRNT,12,53869,-1 ABR,12,99896,-2 Average,17,116597,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $117 million. That figure was $233 million in CDEV's case. Revlon Inc (NYSE:REV) is the most popular stock in this table. On the other hand Hawaiian Holdings, Inc. (NASDAQ:HA) is the least popular one with only 11 bullish hedge fund positions. Centennial Resource Development, Inc. (NASDAQ:CDEV) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CDEV wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CDEV were disappointed as the stock returned -31.6% during the fourth quarter (through the end of November) 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 this year.

Disclosure: None. This article was originally published at Insider Monkey.

Related Content