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Did Hedge Funds Drop The Ball On SRC Energy Inc. (SRCI) ?

Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like SRC Energy Inc. (NYSE:SRCI).

SRC Energy Inc. (NYSE:SRCI) investors should be aware of a decrease in hedge fund interest lately. SRCI was in 14 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 15 hedge funds in our database with SRCI positions at the end of the previous quarter. Our calculations also showed that SRCI isn’t among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Phill Gross, Adage Capital Management

We’re going to take a gander at the latest hedge fund action surrounding SRC Energy Inc. (NYSE:SRCI).

Hedge fund activity in SRC Energy Inc. (NYSE:SRCI)

At Q4’s end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the second quarter of 2018. By comparison, 9 hedge funds held shares or bullish call options in SRCI a year ago. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

SRCI_apr2019

More specifically, SailingStone Capital Partners was the largest shareholder of SRC Energy Inc. (NYSE:SRCI), with a stake worth $120.8 million reported as of the end of December. Trailing SailingStone Capital Partners was Millennium Management, which amassed a stake valued at $30.6 million. Deep Basin Capital, Fine Capital Partners, and Luminus Management were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as SRC Energy Inc. (NYSE:SRCI) has experienced bearish sentiment from hedge fund managers, we can see that there was a specific group of money managers that elected to cut their positions entirely by the end of the third quarter. Intriguingly, Todd J. Kantor’s Encompass Capital Advisors said goodbye to the largest position of the “upper crust” of funds tracked by Insider Monkey, worth close to $36.9 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dumped about $4.4 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 1 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 SRC Energy Inc. (NYSE:SRCI) but similarly valued. These stocks are BrightSphere Investment Group plc (NYSE:BSIG), Monmouth R.E. Inv. Corp. (NYSE:MNR), Gulfport Energy Corporation (NASDAQ:GPOR), and PennyMac Mortgage Investment Trust (NYSE:PMT). This group of stocks’ market valuations are similar to SRCI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BSIG 22 137597 0
MNR 9 63337 1
GPOR 22 129057 2
PMT 11 18567 4
Average 16 87140 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $87 million. That figure was $275 million in SRCI’s case. BrightSphere Investment Group plc (NYSE:BSIG) is the most popular stock in this table. On the other hand Monmouth R.E. Inv. Corp. (NYSE:MNR) is the least popular one with only 9 bullish hedge fund positions. SRC Energy Inc. (NYSE:SRCI) 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 SRCI as the stock returned 41.7% and outperformed the market by an even larger margin.

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

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