Hedge Funds Are Selling Talos Energy, Inc. (TALO)

“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. 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 Talos Energy, Inc. (NYSE:TALO) and see how it was affected.

Talos Energy, Inc. (NYSE:TALO) shareholders have witnessed a decrease in hedge fund interest recently. Our calculations also showed that TALO isn’t among the 30 most popular stocks among hedge funds (see the video below).
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.


Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to analyze the latest hedge fund action regarding Talos Energy, Inc. (NYSE:TALO).

What does smart money think about Talos Energy, Inc. (NYSE:TALO)?

At Q2’s end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the first quarter of 2019. By comparison, 12 hedge funds held shares or bullish call options in TALO a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).


More specifically, Encompass Capital Advisors was the largest shareholder of Talos Energy, Inc. (NYSE:TALO), with a stake worth $35.1 million reported as of the end of March. Trailing Encompass Capital Advisors was Royce & Associates, which amassed a stake valued at $10.9 million. Renaissance Technologies, Citadel Investment Group, and Graham Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Talos Energy, Inc. (NYSE:TALO) has witnessed declining sentiment from hedge fund managers, logic holds that there lies a certain “tier” of hedgies that slashed their positions entirely heading into Q3. At the top of the heap, Ken Griffin’s Citadel Investment Group dumped the biggest stake of all the hedgies monitored by Insider Monkey, totaling about $1.4 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund cut about $1.3 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 3 funds heading into Q3.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Talos Energy, Inc. (NYSE:TALO) but similarly valued. We will take a look at Astronics Corporation (NASDAQ:ATRO), Rush Enterprises, Inc. (NASDAQ:RUSHA), Rambus Inc. (NASDAQ:RMBS), and Vector Group Ltd (NYSE:VGR). This group of stocks’ market values are similar to TALO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ATRO 18 123334 5
RUSHA 20 89775 1
RMBS 16 147460 -1
VGR 18 134559 -4
Average 18 123782 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $124 million. That figure was $66 million in TALO’s case. Rush Enterprises, Inc. (NASDAQ:RUSHA) is the most popular stock in this table. On the other hand Rambus Inc. (NASDAQ:RMBS) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Talos Energy, Inc. (NYSE:TALO) is even less popular than RMBS. Hedge funds dodged a bullet by taking a bearish stance towards TALO. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately TALO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); TALO investors were disappointed as the stock returned -15.5% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.

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