Hedge Funds Are Crazy About Rosehill Resources Inc. (ROSE)

“October lived up to its scary reputation—the S&P 500 falling in the month by the largest amount in the last 40 years, the only worse Octobers being ’08 and the Crash of ’87. For perspective, there have been only 5 occasions in those 40 years when the S&P 500 declined by greater than 20% from peak to trough. Other than the ’87 Crash, all were during recessions. There were 17 other instances, over the same time frame, when the market fell by over 10% but less than 20%. Furthermore, this is the 18th correction of 5% or more since the current bull market started in March ’09. Corrections are the norm. They can be healthy as they often undo market complacency—overbought levels—potentially allowing the market to base and move even higher.” This is how Trapeze Asset Management summarized the recent market moves in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.

Is Rosehill Resources Inc. (NASDAQ:ROSE) a cheap investment today? Money managers are taking an optimistic view. The number of bullish hedge fund bets improved by 11 lately. Our calculations also showed that ROSE isn’t among the 30 most popular stocks among hedge funds. ROSE was in 14 hedge funds’ portfolios at the end of September. There were 3 hedge funds in our database with ROSE positions 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’ 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.

Anchorage Capital 2014 Q2 Investor Letter

Let’s take a look at the recent hedge fund action encompassing Rosehill Resources Inc. (NASDAQ:ROSE).

What does the smart money think about Rosehill Resources Inc. (NASDAQ:ROSE)?

At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 367% from the previous quarter. On the other hand, there were a total of 5 hedge funds with a bullish position in ROSE at the beginning of this year. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with ROSE Positions

According to Insider Monkey’s hedge fund database, Anchorage Advisors, managed by Kevin Michael Ulrich and Anthony Davis, holds the number one position in Rosehill Resources Inc. (NASDAQ:ROSE). Anchorage Advisors has a $3.7 million position in the stock, comprising less than 0.1% of its 13F portfolio. The second most bullish fund manager is Scott Bessent of Key Square Capital Management, with a $3.1 million position; 0.7% of its 13F portfolio is allocated to the stock. Remaining peers that are bullish encompass Kevin Michael Ulrich and Anthony Davis’s Anchorage Advisors, Jonathan Barrett and Paul Segal’s Luminus Management and Anand Parekh’s Alyeska Investment Group.

As one would reasonably expect, specific money managers were leading the bulls’ herd. Key Square Capital Management, managed by Scott Bessent, created the most outsized position in Rosehill Resources Inc. (NASDAQ:ROSE). Key Square Capital Management had $3.1 million invested in the company at the end of the quarter. Jonathan Barrett and Paul Segal’s Luminus Management also initiated a $2.5 million position during the quarter. The other funds with brand new ROSE positions are Anand Parekh’s Alyeska Investment Group, Arvind Sanger’s GeoSphere Capital Management, and Louis Bacon’s Moore Global Investments.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Rosehill Resources Inc. (NASDAQ:ROSE) but similarly valued. These stocks are Hornbeck Offshore Services, Inc. (NYSE:HOS), Universal Stainless & Alloy Products (NASDAQ:USAP), Xerium Technologies, Inc. (NYSE:XRM), and Century Casinos, Inc. (NASDAQ:CNTY). This group of stocks’ market caps match ROSE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HOS 18 91870 0
USAP 7 23380 0
XRM 13 40881 -1
CNTY 9 51395 -2
Average 11.75 51882 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $52 million. That figure was $22 million in ROSE’s case. Hornbeck Offshore Services, Inc. (NYSE:HOS) is the most popular stock in this table. On the other hand Universal Stainless & Alloy Products (NASDAQ:USAP) is the least popular one with only 7 bullish hedge fund positions. Rosehill Resources Inc. (NASDAQ:ROSE) 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 HOS might be a better candidate to consider a long position.

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