Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let's see whether Rattler Midstream LP (NASDAQ:RTLR) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Rattler Midstream LP (NASDAQ:RTLR) was in 8 hedge funds' portfolios at the end of December. RTLR shareholders have witnessed a decrease in support from the world's most elite money managers of late. There were 11 hedge funds in our database with RTLR holdings at the end of the previous quarter. Our calculations also showed that RTLR isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 percentage points since March 2017 (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 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_221556" align="aligncenter" width="399"] Richard Driehaus of Driehaus Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's analyze the fresh hedge fund action regarding Rattler Midstream LP (NASDAQ:RTLR).
How have hedgies been trading Rattler Midstream LP (NASDAQ:RTLR)?
At the end of the fourth quarter, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of -27% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in RTLR a year ago. With the smart money's capital changing hands, there exists an "upper tier" of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
More specifically, Cardinal Capital was the largest shareholder of Rattler Midstream LP (NASDAQ:RTLR), with a stake worth $45.3 million reported as of the end of September. Trailing Cardinal Capital was Zimmer Partners, which amassed a stake valued at $35.8 million. Alyeska Investment Group, SCW Capital Management, and Marshall Wace LLP 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 SCW Capital Management allocated the biggest weight to Rattler Midstream LP (NASDAQ:RTLR), around 3.96% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, earmarking 1.38 percent of its 13F equity portfolio to RTLR.
Since Rattler Midstream LP (NASDAQ:RTLR) has faced bearish sentiment from hedge fund managers, it's safe to say that there is a sect of hedgies who sold off their entire stakes heading into Q4. Intriguingly, Keith Meister's Corvex Capital dumped the biggest investment of the "upper crust" of funds watched by Insider Monkey, totaling about $36.4 million in stock, and Matt Smith's Deep Basin Capital was right behind this move, as the fund said goodbye to about $9.8 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds heading into Q4.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Rattler Midstream LP (NASDAQ:RTLR) but similarly valued. We will take a look at Lexington Realty Trust (NYSE:LXP), Granite Real Estate Investment Trust (NYSE:GRP), Mercury General Corporation (NYSE:MCY), and Euronav NV (NYSE:EURN). All of these stocks' market caps are similar to RTLR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LXP,14,61204,-1 GRP,7,47205,-4 MCY,21,196767,0 EURN,28,232243,10 Average,17.5,134355,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $134 million. That figure was $117 million in RTLR's case. Euronav NV (NYSE:EURN) is the most popular stock in this table. On the other hand Granite Real Estate Investment Trust (NYSE:GRP) is the least popular one with only 7 bullish hedge fund positions. Rattler Midstream LP (NASDAQ:RTLR) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately RTLR wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); RTLR investors were disappointed as the stock returned -77% during the same time 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 most of these stocks already outperformed the market in 2020. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.