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Were Hedge Funds Right About Flocking Into Genesis Energy, L.P. (GEL) ?

Asma UL Husna

Hedge funds and other investment firms run by legendary investors like Israel Englander, Jeffrey Talpins and Ray Dalio are entrusted to manage billions of dollars of accredited investors' money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Genesis Energy, L.P. (NYSE:GEL) investors should pay attention to an increase in hedge fund interest lately. Our calculations also showed that GEL isn't among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

CITADEL INVESTMENT GROUP

We're going to take a look at the new hedge fund action encompassing Genesis Energy, L.P. (NYSE:GEL).

How are hedge funds trading Genesis Energy, L.P. (NYSE:GEL)?

At the end of the fourth quarter, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 150% from the second quarter of 2018. On the other hand, there were a total of 3 hedge funds with a bullish position in GEL a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

GEL_apr2019

The largest stake in Genesis Energy, L.P. (NYSE:GEL) was held by Arrowstreet Capital, which reported holding $3.9 million worth of stock at the end of September. It was followed by Perella Weinberg Partners with a $2 million position. Other investors bullish on the company included Citadel Investment Group, McKinley Capital Management, and Renaissance Technologies.

As industrywide interest jumped, key hedge funds have jumped into Genesis Energy, L.P. (NYSE:GEL) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most outsized position in Genesis Energy, L.P. (NYSE:GEL). Arrowstreet Capital had $3.9 million invested in the company at the end of the quarter. Daniel Arbess's Perella Weinberg Partners also initiated a $2 million position during the quarter. The following funds were also among the new GEL investors: Jim Simons's Renaissance Technologies, Matthew Hulsizer's PEAK6 Capital Management, and Matthew Hulsizer's PEAK6 Capital Management.

Let's check out hedge fund activity in other stocks similar to Genesis Energy, L.P. (NYSE:GEL). These stocks are Spectrum Brands Holdings, Inc. (NYSE:SPB), SiteOne Landscape Supply, Inc. (NYSE:SITE), Alliance Resource Partners, L.P. (NASDAQ:ARLP), and Tempur Sealy International Inc. (NYSE:TPX). This group of stocks' market caps match GEL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPB,25,576863,-1 SITE,11,38041,-4 ARLP,8,96584,-1 TPX,31,1015114,1 Average,18.75,431651,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $432 million. That figure was $7 million in GEL's case. Tempur Sealy International Inc. (NYSE:TPX) is the most popular stock in this table. On the other hand Alliance Resource Partners, L.P. (NASDAQ:ARLP) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Genesis Energy, L.P. (NYSE:GEL) is even less popular than ARLP. Hedge funds clearly dropped the ball on GEL as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on GEL as the stock returned 30.1% and outperformed the market by an even larger margin.

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

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