Did Hedge Funds Drop The Ball On Arco Platform Limited (ARCE)?

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.

Is Arco Platform Limited (NASDAQ:ARCE) a buy, sell, or hold? Investors who are in the know are reducing their bets on the stock. The number of long hedge fund bets shrunk by 12 recently. Our calculations also showed that arce 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’ 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.

Nehal Chopra Tiger Ratan Capital Group

We’re going to take a look at the fresh hedge fund action regarding Arco Platform Limited (NASDAQ:ARCE).

What does the smart money think about Arco Platform Limited (NASDAQ:ARCE)?

At Q4’s end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -55% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ARCE over the last 14 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with ARCE Positions

Among these funds, Ratan Capital Group held the most valuable stake in Arco Platform Limited (NASDAQ:ARCE), which was worth $9.1 million at the end of the fourth quarter. On the second spot was SCGE Management which amassed $6.6 million worth of shares. Moreover, Alyeska Investment Group, Laurion Capital Management, and Garelick Capital Partners were also bullish on Arco Platform Limited (NASDAQ:ARCE), allocating a large percentage of their portfolios to this stock.

Since Arco Platform Limited (NASDAQ:ARCE) has faced a decline in interest from the smart money, it’s safe to say that there exists a select few fund managers who were dropping their positions entirely by the end of the third quarter. It’s worth mentioning that Dan Loeb’s Third Point cut the largest stake of the “upper crust” of funds watched by Insider Monkey, worth close to $5.7 million in stock, and Rob Citrone’s Discovery Capital Management was right behind this move, as the fund dropped about $4.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 12 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Arco Platform Limited (NASDAQ:ARCE) but similarly valued. These stocks are TIER REIT, Inc. (NYSE:TIER), Pitney Bowes Inc. (NYSE:PBI), National Research Corporation (NASDAQ:NRC), and Pacific Biosciences of California, Inc. (NASDAQ:PACB). This group of stocks’ market values resemble ARCE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TIER 7 71133 -2
PBI 20 78677 -2
NRC 5 32066 -1
PACB 21 210649 5
Average 13.25 98131 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $98 million. That figure was $32 million in ARCE’s case. Pacific Biosciences of California, Inc. (NASDAQ:PACB) is the most popular stock in this table. On the other hand National Research Corporation (NASDAQ:NRC) is the least popular one with only 5 bullish hedge fund positions. Arco Platform Limited (NASDAQ:ARCE) is not the least popular stock in this group but hedge fund interest is still below average. 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 ARCE as the stock returned 33.3% and outperformed the market by an even larger margin.

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