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Hedge Funds Are Dumping Montage Resources Corp (MR)

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 Montage Resources Corp (NYSE:MR) and determine whether hedge funds had an edge regarding this stock.

Montage Resources Corp (NYSE:MR) investors should pay attention to a decrease in hedge fund interest lately. Our calculations also showed that MR 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.

William Martin Raging Capital Management

William Martin of Raging Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the recent hedge fund action regarding Montage Resources Corp (NYSE:MR).

Hedge fund activity in Montage Resources Corp (NYSE:MR)

At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -42% from the fourth quarter of 2019. On the other hand, there were a total of 12 hedge funds with a bullish position in MR a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is MR A Good Stock To Buy?

The largest stake in Montage Resources Corp (NYSE:MR) was held by Silver Point Capital, which reported holding $5.1 million worth of stock at the end of September. It was followed by Royce & Associates with a $1.3 million position. Other investors bullish on the company included Adage Capital Management, D E Shaw, and Carlson Capital. In terms of the portfolio weights assigned to each position Silver Point Capital allocated the biggest weight to Montage Resources Corp (NYSE:MR), around 0.6% of its 13F portfolio. Napier Park Global Capital is also relatively very bullish on the stock, setting aside 0.04 percent of its 13F equity portfolio to MR.

Since Montage Resources Corp (NYSE:MR) has experienced a decline in interest from the smart money, we can see that there is a sect of hedge funds who were dropping their entire stakes in the first quarter. Intriguingly, William C. Martin’s Raging Capital Management cut the largest stake of all the hedgies monitored by Insider Monkey, comprising close to $8.9 million in stock, and Scott Kapnick’s HPS Investment Partners was right behind this move, as the fund dumped about $7.3 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 8 funds in the first quarter.

Let’s go over hedge fund activity in other stocks similar to Montage Resources Corp (NYSE:MR). We will take a look at Sorl Auto Parts, Inc. (NASDAQ:SORL), Bank7 Corp. (NASDAQ:BSVN), QEP Resources Inc (NYSE:QEP), and Tupperware Brands Corporation (NYSE:TUP). This group of stocks’ market values match MR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SORL 2 584 -2
BSVN 2 2821 -2
QEP 15 12800 -8
TUP 9 8373 -6
Average 7 6145 -4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $8 million in MR’s case. QEP Resources Inc (NYSE:QEP) is the most popular stock in this table. On the other hand Sorl Auto Parts, Inc. (NASDAQ:SORL) is the least popular one with only 2 bullish hedge fund positions. Montage Resources Corp (NYSE:MR) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on MR as the stock returned 75.6% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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