U.S. Markets closed

Were Hedge Funds Right About Flocking Into Archrock, Inc. (AROC) ?

Abigail Fisher

During the fourth quarter the Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by nearly 7 percentage points as investors worried over the possible ramifications of rising interest rates. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only 298 S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Archrock, Inc. (NYSE:AROC) and see how the stock is affected by the recent hedge fund activity.

Archrock, Inc. (NYSE:AROC) was in 20 hedge funds' portfolios at the end of the fourth quarter of 2018. AROC investors should be aware of an increase in hedge fund sentiment recently. There were 15 hedge funds in our database with AROC positions at the end of the previous quarter. Our calculations also showed that AROC 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' 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 32 percentage points since May 2014 through March 12, 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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Charles Davidson - Wexford Capital

We're going to review the new hedge fund action surrounding Archrock, Inc. (NYSE:AROC).

What have hedge funds been doing with Archrock, Inc. (NYSE:AROC)?

Heading into the first quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from the second quarter of 2018. By comparison, 20 hedge funds held shares or bullish call options in AROC a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

AROC_apr2019

Among these funds, Citadel Investment Group held the most valuable stake in Archrock, Inc. (NYSE:AROC), which was worth $12.1 million at the end of the fourth quarter. On the second spot was Millennium Management which amassed $8.2 million worth of shares. Moreover, Renaissance Technologies, D E Shaw, and SG Capital Management were also bullish on Archrock, Inc. (NYSE:AROC), allocating a large percentage of their portfolios to this stock.

With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. SG Capital Management, managed by Ken Grossman and Glen Schneider, assembled the most valuable position in Archrock, Inc. (NYSE:AROC). SG Capital Management had $4.8 million invested in the company at the end of the quarter. Charles Davidson and Joseph Jacobs's Wexford Capital also initiated a $0.8 million position during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace's Marshall Wace LLP, Matthew Hulsizer's PEAK6 Capital Management, and Benjamin A. Smith's Laurion Capital Management.

Let's now review hedge fund activity in other stocks similar to Archrock, Inc. (NYSE:AROC). We will take a look at Stratasys, Ltd. (NASDAQ:SSYS), 21Vianet Group Inc (NASDAQ:VNET), Bluegreen Vacations Corporation (NYSE:BXG), and Gannett Co., Inc. (NYSE:GCI). This group of stocks' market valuations are closest to AROC's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SSYS,14,97848,0 VNET,17,33841,4 BXG,2,3589,0 GCI,17,74126,-2 Average,12.5,52351,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $52 million. That figure was $41 million in AROC's case. 21Vianet Group Inc (NASDAQ:VNET) is the most popular stock in this table. On the other hand Bluegreen Vacations Corporation (NYSE:BXG) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Archrock, Inc. (NYSE:AROC) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on AROC as the stock returned 44.4% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

Related Content