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 WPX Energy Inc (NYSE:WPX) and determine whether hedge funds had an edge regarding this stock.
Is WPX Energy Inc (NYSE:WPX) a great stock to buy now? Hedge funds were in a bullish mood. The number of long hedge fund positions moved up by 8 recently. WPX Energy Inc (NYSE:WPX) was in 37 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 53. Our calculations also showed that WPX isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind we’re going to view the key hedge fund action regarding WPX Energy Inc (NYSE:WPX).
Hedge fund activity in WPX Energy Inc (NYSE:WPX)
At the end of June, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 28% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in WPX over the last 20 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
Among these funds, Adage Capital Management held the most valuable stake in WPX Energy Inc (NYSE:WPX), which was worth $49.3 million at the end of the third quarter. On the second spot was Omega Advisors which amassed $41.1 million worth of shares. Deep Basin Capital, AQR Capital Management, and D E Shaw were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Yaupon Capital allocated the biggest weight to WPX Energy Inc (NYSE:WPX), around 4.79% of its 13F portfolio. Omega Advisors is also relatively very bullish on the stock, earmarking 4.7 percent of its 13F equity portfolio to WPX.
As one would reasonably expect, key money managers were breaking ground themselves. Cove Street Capital, managed by Jeffrey Bronchick, initiated the biggest position in WPX Energy Inc (NYSE:WPX). Cove Street Capital had $11.5 million invested in the company at the end of the quarter. Wayne Cooperman’s Cobalt Capital Management also initiated a $4.8 million position during the quarter. The other funds with brand new WPX positions are Clint Carlson’s Carlson Capital, Minhua Zhang’s Weld Capital Management, and Greg Poole’s Echo Street Capital Management.
Let’s now review hedge fund activity in other stocks similar to WPX Energy Inc (NYSE:WPX). These stocks are Terreno Realty Corporation (NYSE:TRNO), Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), Medallia, Inc. (NYSE:MDLA), Black Hills Corporation (NYSE:BKH), Braskem SA (NYSE:BAK), Physicians Realty Trust (NYSE:DOC), and Hamilton Lane Incorporated (NASDAQ:HLNE). This group of stocks’ market values are closest to WPX’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.7 hedge funds with bullish positions and the average amount invested in these stocks was $221 million. That figure was $231 million in WPX’s case. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is the most popular stock in this table. On the other hand Braskem SA (NYSE:BAK) is the least popular one with only 7 bullish hedge fund positions. WPX Energy Inc (NYSE:WPX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for WPX is 75.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately WPX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on WPX were disappointed as the stock returned -12.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.