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Did Hedge Funds Drop The Ball On U.S. Silica Holdings Inc (SLCA) ?

The fourth quarter was a rough one for most investors, as fears of a rising interest rate environment in the U.S, a trade war with China, and a more or less stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards U.S. Silica Holdings Inc (NYSE:SLCA), and what that likely means for the prospects of the company and its stock.

Is U.S. Silica Holdings Inc (NYSE:SLCA) the right pick for your portfolio? Hedge funds are in a pessimistic mood. The number of long hedge fund bets retreated by 2 recently. Our calculations also showed that SLCA isn’t among the 30 most popular stocks among hedge funds. SLCA was in 14 hedge funds’ portfolios at the end of December. There were 16 hedge funds in our database with SLCA holdings at the end of the previous quarter.

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’ 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.

Prem Watsa, Fairfax Financial Holdings

Let’s check out the fresh hedge fund action encompassing U.S. Silica Holdings Inc (NYSE:SLCA).

What have hedge funds been doing with U.S. Silica Holdings Inc (NYSE:SLCA)?

Heading into the first quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from the second quarter of 2018. By comparison, 19 hedge funds held shares or bullish call options in SLCA a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

SLCA_may2019

The largest stake in U.S. Silica Holdings Inc (NYSE:SLCA) was held by Ariel Investments, which reported holding $101.7 million worth of stock at the end of December. It was followed by Rima Senvest Management with a $33.8 million position. Other investors bullish on the company included Prescott Group Capital Management, Blue Mountain Capital, and Royce & Associates.

Because U.S. Silica Holdings Inc (NYSE:SLCA) has experienced falling interest from the aggregate hedge fund industry, we can see that there is a sect of hedge funds that elected to cut their positions entirely last quarter. Intriguingly, MacKenzie B. Davis and Kenneth L. Settles Jr’s SailingStone Capital Partners sold off the biggest investment of all the hedgies followed by Insider Monkey, valued at close to $12.3 million in call options. Alex Snow’s fund, Lansdowne Partners, also said goodbye to its call options, about $4.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 2 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as U.S. Silica Holdings Inc (NYSE:SLCA) but similarly valued. These stocks are Denbury Resources Inc. (NYSE:DNR), Wesco Aircraft Holdings Inc (NYSE:WAIR), 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS), and Global Cord Blood Corporation (NYSE:CO). This group of stocks’ market valuations are similar to SLCA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DNR 21 50998 0
WAIR 17 172345 0
FLWS 14 47700 0
CO 7 29046 0
Average 14.75 75022 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $75 million. That figure was $178 million in SLCA’s case. Denbury Resources Inc. (NYSE:DNR) is the most popular stock in this table. On the other hand Global Cord Blood Corporation (NYSE:CO) is the least popular one with only 7 bullish hedge fund positions. U.S. Silica Holdings Inc (NYSE:SLCA) 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 SLCA as the stock returned 81.1% and outperformed the market by an even larger margin.

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

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