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Hedge Funds Are Betting On Talos Energy, Inc. (TALO)

Last year’s fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 37.4% in 2019 (through the end of November) and outperformed the S&P 500 ETF by 9.9 percentage points. We are done processing the latest 13F filings and in this article we will study how hedge fund sentiment towards Talos Energy, Inc. (NYSE:TALO) changed during the first quarter.

Talos Energy, Inc. (NYSE:TALO) investors should pay attention to an increase in hedge fund interest recently. TALO was in 15 hedge funds’ portfolios at the end of the third quarter of 2019. There were 14 hedge funds in our database with TALO holdings at the end of the previous quarter. Our calculations also showed that TALO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Clint Carlson of Carlson Capital

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy  based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s take a glance at the latest hedge fund action encompassing Talos Energy, Inc. (NYSE:TALO).

How are hedge funds trading Talos Energy, Inc. (NYSE:TALO)?

At Q3’s end, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TALO over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Todd J. Kantor’s Encompass Capital Advisors has the largest position in Talos Energy, Inc. (NYSE:TALO), worth close to $35 million, comprising 2.4% of its total 13F portfolio. On Encompass Capital Advisors’s heels is Royce & Associates, led by Chuck Royce, holding a $7.7 million position; 0.1% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that hold long positions comprise Israel Englander’s Millennium Management, Ken Griffin’s Citadel Investment Group and Renaissance Technologies. In terms of the portfolio weights assigned to each position GeoSphere Capital Management allocated the biggest weight to Talos Energy, Inc. (NYSE:TALO), around 2.57% of its 13F portfolio. Encompass Capital Advisors is also relatively very bullish on the stock, earmarking 2.4 percent of its 13F equity portfolio to TALO.

Now, specific money managers were leading the bulls’ herd. Carlson Capital, managed by Clint Carlson, assembled the largest position in Talos Energy, Inc. (NYSE:TALO). Carlson Capital had $1 million invested in the company at the end of the quarter. David Harding’s Winton Capital Management also initiated a $0.4 million position during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Peter Algert and Kevin Coldiron’s Algert Coldiron Investors.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Talos Energy, Inc. (NYSE:TALO) but similarly valued. These stocks are John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS), Varex Imaging Corporation (NASDAQ:VREX), Wesco Aircraft Holdings Inc (NYSE:WAIR), and Geopark Ltd (NYSE:GPRK). This group of stocks’ market valuations are similar to TALO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JBSS 15 55397 5
VREX 20 92701 0
WAIR 23 226099 2
GPRK 8 96471 -2
Average 16.5 117667 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $65 million in TALO’s case. Wesco Aircraft Holdings Inc (NYSE:WAIR) is the most popular stock in this table. On the other hand Geopark Ltd (NYSE:GPRK) is the least popular one with only 8 bullish hedge fund positions. Talos Energy, Inc. (NYSE:TALO) is not the least popular stock in this group but hedge fund interest is still below average. 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 TALO as the stock returned 14.1% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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