The $3 trillion hedge fund industry which once used to be the darling of investors and normal stock traders is under pressure due to declining returns, high fees and scandals. But our research shows that hedge funds remain the best stock pickers, and piggybacking their selected moves still provide huge gains, only for those who know where to look. For example, in the third quarter, 627 out of 659 hedge funds in our database returned 8.3% from their long positions in companies which have a market cap of at least $1 billion, versus the S&P 500 ETFs’ return of 3.3%.
Similarly, our research has established that hedge funds tend to beat the market in small cap picks, about which there is always a scant publicly-available information, making it impossible for an average investor to evaluate the hidden gems in this sector. But hedge funds have enormous resources, connections and data-mining and research assets, and they are always aware of the best places to funnel money for future profits. Small cap stocks have outperformed large-cap index funds by more than 10 percentage points on average since the end of June. John Griffin’s Blue Ridge Capital is a case in point, whose small-cap picks outperformed the market by a noticeable margin. Backtests performed by Insider Monkey’s research team show that Blue Ridge Capital returned 0.97% per month from its positions in companies which have a market cap of $1 billion- $5 billion in the period between 1999-2012, whereas S&P 500 Index returned 0.32% per month in the same period. Having this performance metric in mind, let’s analyze Blue Ridge’s top 5 small-cap picks in the third quarter.
Gulfport Energy Corporation (NASDAQ:GPOR)
Blue Ridge Capital reported owning a $44.211 million stake in Gulfport Energy Corporation (NASDAQ:GPOR), or 1.56 million shares, at the end of the third quarter. The Oklahoma-based energy company recently announced acquisition of 12,600 net undeveloped acres located in Ohio in the core of the dry gas window of the Utica Shale for $87 million. Shares have rebounded recently along with natural gas prices and the stock is up over 18% year-to-date. At the end of the September quarter, 34 funds in our system were bullish on Gulfport Energy Corporation (NASDAQ:GPOR), down from 40 funds a quarter earlier.
Oasis Petroleum Inc. (NYSE:OAS)
John Griffin’s fund reported ownership of 4.29 million Oasis Petroleum Inc. (NYSE:OAS) shares at the end of the third quarter, with a net worth of $44.92 million. Shares of Texas-based oil and gas company have gained over 110% in value since the start of 2016. On Wednesday, KLR Group reiterated a ‘Buy rating’ for Oasis Petroleum (NYSE: OAS) and upped its price target to $22 from $19, citing the bright future prospects for Oasis due to recovering commodity prices and the company’s ownership of some prime fields in the Williston Basin. John H. Scully’s SPO Advisory Corp owns 19.91 million shares of Oasis Petroleum (NYSE: OAS), as of the end of the September quarter.
On the next page, we will analyze some other Blue Ridge’s small-cap picks.