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Is TransAtlantic Petroleum Ltd (TAT) Going To Burn These Hedge Funds ?

Asma UL Husna

Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 8.5 percentage points through November 22nd. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.

Is TransAtlantic Petroleum Ltd (NYSE:TAT) a bargain? Hedge funds are taking a pessimistic view. The number of bullish hedge fund bets were cut by 1 recently. Our calculations also showed that TAT isn't among the 30 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_26340" align="aligncenter" width="467"] Ken Griffin of Citadel Investment Group[/caption]

CITADEL INVESTMENT GROUP

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. We're going to take a look at the new hedge fund action regarding TransAtlantic Petroleum Ltd (NYSE:TAT).

What does smart money think about TransAtlantic Petroleum Ltd (NYSE:TAT)?

Heading into the fourth quarter of 2019, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from one quarter earlier. By comparison, 3 hedge funds held shares or bullish call options in TAT 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.

TAT_nov2019

Among these funds, Nokomis Capital held the most valuable stake in TransAtlantic Petroleum Ltd (NYSE:TAT), which was worth $5 million at the end of the third quarter. On the second spot was Millennium Management which amassed $0 million worth of shares. Citadel Investment Group was 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 Nokomis Capital allocated the biggest weight to TransAtlantic Petroleum Ltd (NYSE:TAT), around 1.08% of its portfolio. Millennium Management is also relatively very bullish on the stock, dishing out 0 percent of its 13F equity portfolio to TAT.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Renaissance Technologies. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified TAT as a viable investment and initiated a position in the stock.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as TransAtlantic Petroleum Ltd (NYSE:TAT) but similarly valued. These stocks are Xtant Medical Holdings, Inc. (NYSE:XTNT), Xcel Brands Inc (NASDAQ:XELB), Capstone Turbine Corporation (NASDAQ:CPST), and Actinium Pharmaceuticals Inc (NYSE:ATNM). This group of stocks' market valuations resemble TAT's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XTNT,3,29952,0 XELB,4,613,2 CPST,5,3897,0 ATNM,6,3882,0 Average,4.5,9586,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $10 million. That figure was $5 million in TAT's case. Actinium Pharmaceuticals Inc (NYSE:ATNM) is the most popular stock in this table. On the other hand Xtant Medical Holdings, Inc. (NYSE:XTNT) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks TransAtlantic Petroleum Ltd (NYSE:TAT) is even less popular than XTNT. Hedge funds dodged a bullet by taking a bearish stance towards TAT. Our calculations showed that the top 20 most popular hedge fund stocks returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately TAT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); TAT investors were disappointed as the stock returned -42.6% during the fourth quarter (through 11/22) 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 70 percent of these stocks already outperformed the market so far in Q4.

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

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