Did Hedge Funds Make The Right Call On Arch Resources, Inc. (ARCH) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Arch Resources, Inc. (NYSE:ARCH) and determine whether hedge funds had an edge regarding this stock.

Is Arch Resources, Inc. (NYSE:ARCH) a buy right now? The smart money was in a bearish mood. The number of bullish hedge fund positions were trimmed by 2 lately. Our calculations also showed that ARCH isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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.

James Dondero Highland Capital Management

James Dondero of Highland Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we’re going to review the fresh hedge fund action regarding Arch Resources, Inc. (NYSE:ARCH).

Hedge fund activity in Arch Resources, Inc. (NYSE:ARCH)

At Q1’s end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ARCH over the last 18 quarters. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in Arch Resources, Inc. (NYSE:ARCH) was held by Luminus Management, which reported holding $18.4 million worth of stock at the end of September. It was followed by Maple Rock Capital with a $15.6 million position. Other investors bullish on the company included Highland Capital Management, Citadel Investment Group, and Skylands Capital. In terms of the portfolio weights assigned to each position Anchor Bolt Capital allocated the biggest weight to Arch Resources, Inc. (NYSE:ARCH), around 7.66% of its 13F portfolio. Maple Rock Capital is also relatively very bullish on the stock, dishing out 4.01 percent of its 13F equity portfolio to ARCH.

Due to the fact that Arch Resources, Inc. (NYSE:ARCH) has faced falling interest from the aggregate hedge fund industry, we can see that there is a sect of hedge funds who sold off their entire stakes in the first quarter. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP dumped the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth close to $4 million in stock. Noam Gottesman’s fund, GLG Partners, also said goodbye to its stock, about $3.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds in the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Arch Resources, Inc. (NYSE:ARCH) but similarly valued. These stocks are CrossFirst Bankshares, Inc. (NASDAQ:CFB), Kimball International Inc (NASDAQ:KBAL), Merchants Bancorp (NASDAQ:MBIN), and Ichor Holdings Ltd. (NASDAQ:ICHR). All of these stocks’ market caps resemble ARCH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CFB 6 8848 0
KBAL 12 79326 0
MBIN 8 9811 -1
ICHR 14 33383 -1
Average 10 32842 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $33 million. That figure was $89 million in ARCH’s case. Ichor Holdings Ltd. (NASDAQ:ICHR) is the most popular stock in this table. On the other hand CrossFirst Bankshares, Inc. (NASDAQ:CFB) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Arch Resources, Inc. (NYSE:ARCH) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately ARCH wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ARCH were disappointed as the stock returned -1.7% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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