Did Hedge Funds Drop The Ball On Teekay Offshore Partners L.P. (TOO) ?

Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Teekay Offshore Partners L.P. (NYSE:TOO) and see how the stock is affected by the recent hedge fund activity.

Teekay Offshore Partners L.P. (NYSE:TOO) was in 8 hedge funds’ portfolios at the end of September. TOO investors should pay attention to an increase in activity from the world’s largest hedge funds lately. There were 6 hedge funds in our database with TOO positions at the end of the previous quarter. Our calculations also showed that TOO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

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.

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the recent hedge fund action encompassing Teekay Offshore Partners L.P. (NYSE:TOO).

Hedge fund activity in Teekay Offshore Partners L.P. (NYSE:TOO)

At the end of the third quarter, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from the previous quarter. On the other hand, there were a total of 7 hedge funds with a bullish position in TOO a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Teekay Offshore Partners L.P. (NYSE:TOO) was held by Aquamarine Capital Management, which reported holding $1.2 million worth of stock at the end of September. It was followed by Royce & Associates with a $0.5 million position. Other investors bullish on the company included Renaissance Technologies, Fondren Management, and Millennium Management. In terms of the portfolio weights assigned to each position Aquamarine Capital Management allocated the biggest weight to Teekay Offshore Partners L.P. (NYSE:TOO), around 0.59% of its 13F portfolio. Fondren Management is also relatively very bullish on the stock, designating 0.19 percent of its 13F equity portfolio to TOO.

As aggregate interest increased, key money managers were breaking ground themselves. Fondren Management, managed by Bradley Louis Radoff, established the biggest position in Teekay Offshore Partners L.P. (NYSE:TOO). Fondren Management had $0.2 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace also initiated a $0 million position during the quarter.

Let’s go over hedge fund activity in other stocks similar to Teekay Offshore Partners L.P. (NYSE:TOO). We will take a look at Solid Biosciences Inc. (NASDAQ:SLDB), Gran Tierra Energy Inc. (NYSE:GTE), Shoe Carnival, Inc. (NASDAQ:SCVL), and Entercom Communications Corp. (NYSE:ETM). All of these stocks’ market caps match TOO’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $120 million. That figure was $2 million in TOO’s case. Entercom Communications Corp. (NYSE:ETM) is the most popular stock in this table. On the other hand Solid Biosciences Inc. (NASDAQ:SLDB) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Teekay Offshore Partners L.P. (NYSE:TOO) is even less popular than SLDB. Hedge funds clearly dropped the ball on TOO as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on TOO as the stock returned 33.6% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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