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Did Hedge Funds Drop The Ball On Contura Energy, Inc. (CTRA)?

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Contura Energy, Inc. (NYSE:CTRA) was in 21 hedge funds’ portfolios at the end of the third quarter of 2019. CTRA has seen a decrease in support from the world’s most elite money managers lately. There were 22 hedge funds in our database with CTRA holdings at the end of the previous quarter. Our calculations also showed that CTRA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.

Andy Redleaf Andrew Redleaf Whitebox Advisors

Andy Redleaf of Whitebox Advisors

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s take a gander at the latest hedge fund action encompassing Contura Energy, Inc. (NYSE:CTRA).

Hedge fund activity in Contura Energy, Inc. (NYSE:CTRA)

Heading into the fourth quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in CTRA a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

Among these funds, Whitebox Advisors held the most valuable stake in Contura Energy, Inc. (NYSE:CTRA), which was worth $49.9 million at the end of the third quarter. On the second spot was Highbridge Capital Management which amassed $36 million worth of shares. Solus Alternative Asset Management, Alta Fundamental Advisers, and Mangrove Partners 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 Alta Fundamental Advisers allocated the biggest weight to Contura Energy, Inc. (NYSE:CTRA), around 15.1% of its 13F portfolio. Solus Alternative Asset Management is also relatively very bullish on the stock, designating 8.51 percent of its 13F equity portfolio to CTRA.

Due to the fact that Contura Energy, Inc. (NYSE:CTRA) has witnessed falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of money managers that decided to sell off their entire stakes heading into Q4. Intriguingly, Jerome L. Simon’s Lonestar Capital Management dropped the biggest investment of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $6.6 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund said goodbye to about $5.3 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Contura Energy, Inc. (NYSE:CTRA). We will take a look at Carbonite Inc (NASDAQ:CARB), Digital Turbine Inc (NASDAQ:APPS), Intersect ENT Inc (NASDAQ:XENT), and First Financial Corp (NASDAQ:THFF). This group of stocks’ market caps are closest to CTRA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CARB 24 78036 5
APPS 19 32614 8
XENT 20 209156 5
THFF 8 14815 -1
Average 17.75 83655 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $84 million. That figure was $202 million in CTRA’s case. Carbonite Inc (NASDAQ:CARB) is the most popular stock in this table. On the other hand First Financial Corp (NASDAQ:THFF) is the least popular one with only 8 bullish hedge fund positions. Contura Energy, Inc. (NYSE:CTRA) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CTRA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CTRA were disappointed as the stock returned -76.1% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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