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Approach Resources Inc. (AREX): Are Hedge Funds Right About This Stock?

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Legendary investors such as Leon Cooperman and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don’t publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That’s why we analyze the activity of those successful funds in these small-cap stocks. In the following paragraphs, we analyze Approach Resources Inc. (NASDAQ:AREX) from the perspective of those successful funds.

Is Approach Resources Inc. (NASDAQ:AREX) a buy here? Hedge funds are undoubtedly turning bullish. The number of bullish hedge fund positions that are disclosed in regulatory 13F filings experienced an increase of 4 lately. AREX was in 10 hedge funds’ portfolios at the end of the third quarter of 2016. There were 6 hedge funds in our database with AREX positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as StealthGas Inc. (NASDAQ:GASS), Tetraphase Pharmaceuticals Inc (NASDAQ:TTPH), and Calamos Asset Management, Inc (NASDAQ:CLMS) to gather more data points.

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We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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How are hedge funds trading Approach Resources Inc. (NASDAQ:AREX)?

At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, up by 67% from the second quarter of 2016. The graph below displays the number of hedge funds with bullish position in AREX over the last 5 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

HedgeFundSentimentChart

When looking at the institutional investors followed by Insider Monkey, Marathon Asset Management, led by Bruce J. Richards and Louis Hanover, holds the largest position in Approach Resources Inc. (NASDAQ:AREX). Marathon Asset Management has a $3.7 million position in the stock. On Marathon Asset Management’s heels is Cove Street Capital, led by Jeffrey Bronchick, which holds a $2.4 million position. Some other hedge funds and institutional investors that are bullish consist of Mark T. Gallogly’s Centerbridge Partners, Millennium Management, one of the 10 largest hedge funds in the world, and Charles Davidson’s Wexford Capital. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

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