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Hedge Funds Are Crazy About Laredo Petroleum Inc (LPI)

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying for a while now that the current market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the third quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Laredo Petroleum Inc (NYSE:LPI) changed recently.

Laredo Petroleum Inc (NYSE:LPI) was in 20 hedge funds’ portfolios at the end of September. LPI investors should pay attention to an increase in hedge fund sentiment in recent months. There were 16 hedge funds in our database with LPI positions at the end of the previous quarter. Our calculations also showed that LPI isn’t among the 30 most popular stocks among hedge funds.

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’ 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 market by 18 percentage points since May 2014 through December 3, 2018 (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.

Izzy Englander of MILLENNIUM MANAGEMENT

Let’s take a look at the new hedge fund action encompassing Laredo Petroleum Inc (NYSE:LPI).

What have hedge funds been doing with Laredo Petroleum Inc (NYSE:LPI)?

At Q3’s end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LPI over the last 13 quarters. With hedgies’ capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

LPI_dec2018

Among these funds, SailingStone Capital Partners held the most valuable stake in Laredo Petroleum Inc (NYSE:LPI), which was worth $321.3 million at the end of the third quarter. On the second spot was Millennium Management which amassed $75.4 million worth of shares. Moreover, AQR Capital Management, Water Street Capital, and Laurion Capital Management were also bullish on Laredo Petroleum Inc (NYSE:LPI), allocating a large percentage of their portfolios to this stock.

Consequently, specific money managers have been driving this bullishness. Laurion Capital Management, managed by Benjamin A. Smith, created the most outsized position in Laredo Petroleum Inc (NYSE:LPI). Laurion Capital Management had $29.3 million invested in the company at the end of the quarter. Daniel S. Och’s OZ Management also made a $1.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Louis Bacon’s Moore Global Investments, David Costen Haley’s HBK Investments, and George Zweig, Shane Haas and Ravi Chander’s Signition LP.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Laredo Petroleum Inc (NYSE:LPI) but similarly valued. We will take a look at Mack Cali Realty Corp (NYSE:CLI), MSG Networks Inc (NYSE:MSGN), Shenandoah Telecommunications Company (NASDAQ:SHEN), and Brinker International, Inc. (NYSE:EAT). This group of stocks’ market valuations are closest to LPI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CLI 11 113715 -3
MSGN 23 383172 0
SHEN 14 72514 8
EAT 26 196941 6
Average 18.5 191586 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $192 million. That figure was $590 million in LPI’s case. Brinker International, Inc. (NYSE:EAT) is the most popular stock in this table. On the other hand Mack Cali Realty Corp (NYSE:CLI) is the least popular one with only 11 bullish hedge fund positions. Laredo Petroleum Inc (NYSE:LPI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard EAT might be a better candidate to consider a long position.

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

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