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Did Hedge Funds Drop The Ball On Kimbell Royalty Partners, LP (KRP)?

The elite funds run by legendary investors such as David Tepper and Dan Loeb make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don’t follow. Because of their pay structures, they have strong incentives to do the research necessary to beat the market. That’s why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at Kimbell Royalty Partners, LP (NYSE:KRP) from the perspective of those elite funds.

Kimbell Royalty Partners, LP (NYSE:KRP) investors should pay attention to a decrease in hedge fund sentiment recently. Our calculations also showed that KRP isn’t among the 30 most popular stocks among hedge funds.

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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

setting up a hedge fund

We’re going to analyze the key hedge fund action regarding Kimbell Royalty Partners, LP (NYSE:KRP).

Hedge fund activity in Kimbell Royalty Partners, LP (NYSE:KRP)

Heading into the first quarter of 2019, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in KRP a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

KRP_may2019

More specifically, Nokomis Capital was the largest shareholder of Kimbell Royalty Partners, LP (NYSE:KRP), with a stake worth $4.8 million reported as of the end of December. Trailing Nokomis Capital was Soros Fund Management, which amassed a stake valued at $3.1 million. Moore Global Investments, Renaissance Technologies, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

Since Kimbell Royalty Partners, LP (NYSE:KRP) has experienced bearish sentiment from hedge fund managers, it’s easy to see that there is a sect of money managers who were dropping their positions entirely heading into Q3. Intriguingly, Anand Parekh’s Alyeska Investment Group cut the largest stake of all the hedgies tracked by Insider Monkey, valued at close to $4 million in stock. David Costen Haley’s fund, HBK Investments, also dropped its stock, about $2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to Kimbell Royalty Partners, LP (NYSE:KRP). We will take a look at Mistras Group, Inc. (NYSE:MG), Harmonic Inc (NASDAQ:HLIT), GlycoMimetics, Inc. (NASDAQ:GLYC), and Financial Institutions, Inc. (NASDAQ:FISI). This group of stocks’ market caps are similar to KRP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MG 12 29477 -1
HLIT 13 59986 1
GLYC 10 38363 0
FISI 10 35681 -2
Average 11.25 40877 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $41 million. That figure was $11 million in KRP’s case. Harmonic Inc (NASDAQ:HLIT) is the most popular stock in this table. On the other hand GlycoMimetics, Inc. (NASDAQ:GLYC) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Kimbell Royalty Partners, LP (NYSE:KRP) is even less popular than GLYC. Hedge funds clearly dropped the ball on KRP as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 KRP as the stock returned 35.7% and outperformed the market by an even larger margin.

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

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