Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Unit Corporation (NYSE:UNT).
Is Unit Corporation (NYSE:UNT) a superb stock to buy now? Money managers are getting less bullish. The number of long hedge fund positions fell by 5 lately. Our calculations also showed that UNT isn't among the 30 most popular stocks among hedge funds. UNT was in 10 hedge funds' portfolios at the end of March. There were 15 hedge funds in our database with UNT positions at the end of the previous quarter.
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' 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 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's take a peek at the fresh hedge fund action regarding Unit Corporation (NYSE:UNT).
What does smart money think about Unit Corporation (NYSE:UNT)?
Heading into the second quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in UNT over the last 15 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Marshall Wace LLP held the most valuable stake in Unit Corporation (NYSE:UNT), which was worth $7.1 million at the end of the first quarter. On the second spot was Royce & Associates which amassed $2 million worth of shares. Moreover, D E Shaw, Millennium Management, and Arrowstreet Capital were also bullish on Unit Corporation (NYSE:UNT), allocating a large percentage of their portfolios to this stock.
Due to the fact that Unit Corporation (NYSE:UNT) has witnessed declining sentiment from hedge fund managers, logic holds that there exists a select few hedge funds who were dropping their positions entirely in the third quarter. It's worth mentioning that Phil Frohlich's Prescott Group Capital Management cut the largest investment of all the hedgies followed by Insider Monkey, valued at close to $1.2 million in stock. Peter Algert and Kevin Coldiron's fund, Algert Coldiron Investors, also said goodbye to its stock, about $1.2 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 5 funds in the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Unit Corporation (NYSE:UNT) but similarly valued. We will take a look at Delek Logistics Partners LP (NYSE:DKL), Rocket Pharmaceuticals, Inc. (NASDAQ:RCKT), Regis Corporation (NYSE:RGS), and CymaBay Therapeutics Inc (NASDAQ:CBAY). This group of stocks' market caps resemble UNT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DKL,1,3067,-1 RCKT,13,212219,-1 RGS,15,293013,3 CBAY,29,407226,2 Average,14.5,228881,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $229 million. That figure was $15 million in UNT's case. CymaBay Therapeutics Inc (NASDAQ:CBAY) is the most popular stock in this table. On the other hand Delek Logistics Partners LP (NYSE:DKL) is the least popular one with only 1 bullish hedge fund positions. Unit Corporation (NYSE:UNT) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately UNT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); UNT investors were disappointed as the stock returned -40.8% 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.