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Did Hedge Funds Make The Right Call On Callon Petroleum Company (CPE) ?

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 Callon Petroleum Company (NYSE:CPE) and determine whether hedge funds had an edge regarding this stock.

Callon Petroleum Company (NYSE:CPE) was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. CPE has experienced a decrease in enthusiasm from smart money lately. There were 27 hedge funds in our database with CPE holdings at the end of the previous quarter. Our calculations also showed that CPE 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.

To the average investor there are a multitude of formulas shareholders can use to size up publicly traded companies. A couple of the most useful formulas are hedge fund and insider trading activity. We have shown that, historically, those who follow the best picks of the top money managers can beat the broader indices by a significant amount (see the details here).

Didric Cederholm Lion Point Capital

Didric Cederholm of Lion Point Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a look at the recent hedge fund action surrounding Callon Petroleum Company (NYSE:CPE).

What does smart money think about Callon Petroleum Company (NYSE:CPE)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -37% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in CPE a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

The largest stake in Callon Petroleum Company (NYSE:CPE) was held by Lion Point, which reported holding $4.5 million worth of stock at the end of September. It was followed by Arosa Capital Management with a $2.1 million position. Other investors bullish on the company included Carlson Capital, Millennium Management, and Luminus Management. In terms of the portfolio weights assigned to each position Lion Point allocated the biggest weight to Callon Petroleum Company (NYSE:CPE), around 1.19% of its 13F portfolio. Arosa Capital Management is also relatively very bullish on the stock, setting aside 0.25 percent of its 13F equity portfolio to CPE.

Since Callon Petroleum Company (NYSE:CPE) has witnessed declining sentiment from the aggregate hedge fund industry, it’s safe to say that there is a sect of hedgies who were dropping their entire stakes in the first quarter. At the top of the heap, Cliff Asness’s AQR Capital Management said goodbye to the biggest investment of all the hedgies followed by Insider Monkey, comprising an estimated $56.6 million in stock, and Ken Fisher’s Fisher Asset Management was right behind this move, as the fund dumped about $31.5 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 10 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Callon Petroleum Company (NYSE:CPE). These stocks are Alphatec Holdings Inc (NASDAQ:ATEC), CTO Realty Growth Inc (NYSE:CTO), Wins Finance Holdings Inc. (NASDAQ:WINS), and MannKind Corporation (NASDAQ:MNKD). This group of stocks’ market caps resemble CPE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ATEC 15 22025 1
CTO 10 22599 -2
WINS 1 196 0
MNKD 5 2540 -4
Average 7.75 11840 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $12 million in CPE’s case. Alphatec Holdings Inc (NASDAQ:ATEC) is the most popular stock in this table. On the other hand Wins Finance Holdings Inc. (NASDAQ:WINS) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Callon Petroleum Company (NYSE:CPE) 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 returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on CPE as the stock returned 138.2% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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