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Were These Hedge Funds Wrong About Flocking Into WPX Energy Inc (WPX)?

·6 min read

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards WPX Energy Inc (NYSE:WPX).

Is WPX Energy Inc (NYSE:WPX) going to take off soon? Investors who are in the know were taking a bullish view. The number of bullish hedge fund bets improved by 8 recently. WPX Energy Inc (NYSE:WPX) was in 37 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 53. Our calculations also showed that WPX isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 56 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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Minhua Zhang of Weld Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we're going to view the latest hedge fund action surrounding WPX Energy Inc (NYSE:WPX).

Hedge fund activity in WPX Energy Inc (NYSE:WPX)

At the end of the second quarter, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 28% from one quarter earlier. On the other hand, there were a total of 40 hedge funds with a bullish position in WPX a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Among these funds, Adage Capital Management held the most valuable stake in WPX Energy Inc (NYSE:WPX), which was worth $49.3 million at the end of the third quarter. On the second spot was Omega Advisors which amassed $41.1 million worth of shares. Deep Basin Capital, AQR Capital Management, and D E Shaw 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 Yaupon Capital allocated the biggest weight to WPX Energy Inc (NYSE:WPX), around 4.79% of its 13F portfolio. Omega Advisors is also relatively very bullish on the stock, dishing out 4.7 percent of its 13F equity portfolio to WPX.

As aggregate interest increased, specific money managers were breaking ground themselves. Cove Street Capital, managed by Jeffrey Bronchick, initiated the most valuable position in WPX Energy Inc (NYSE:WPX). Cove Street Capital had $11.5 million invested in the company at the end of the quarter. Wayne Cooperman's Cobalt Capital Management also made a $4.8 million investment in the stock during the quarter. The other funds with brand new WPX positions are Clint Carlson's Carlson Capital, Minhua Zhang's Weld Capital Management, and Greg Poole's Echo Street Capital Management.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as WPX Energy Inc (NYSE:WPX) but similarly valued. We will take a look at Terreno Realty Corporation (NYSE:TRNO), Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), Medallia, Inc. (NYSE:MDLA), Black Hills Corporation (NYSE:BKH), Braskem SA (NYSE:BAK), Physicians Realty Trust (NYSE:DOC), and Hamilton Lane Incorporated (NASDAQ:HLNE). This group of stocks' market caps resemble WPX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRNO,9,29693,-1 ARNA,41,814569,5 MDLA,18,257841,-2 BKH,22,182307,4 BAK,7,36296,1 DOC,15,106429,-1 HLNE,19,118594,10 Average,18.7,220818,2.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.7 hedge funds with bullish positions and the average amount invested in these stocks was $221 million. That figure was $231 million in WPX's case. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is the most popular stock in this table. On the other hand Braskem SA (NYSE:BAK) is the least popular one with only 7 bullish hedge fund positions. WPX Energy Inc (NYSE:WPX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for WPX is 75.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately WPX wasn't nearly as popular as these 10 stocks and hedge funds that were betting on WPX were disappointed as the stock returned -27.7% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Get real-time email alerts: Follow Wpx Energy Inc. (NYSE:WPX)

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

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