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Hedge Funds Had Impeccable Timing Selling CARBO Ceramics Inc. (CRR)?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like CARBO Ceramics Inc. (NYSE:CRR).

Is CARBO Ceramics Inc. (NYSE:CRR) a healthy stock for your portfolio? Hedge funds are taking a bearish view. The number of bullish hedge fund positions fell by 2 recently. Our calculations also showed that CRR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

RENAISSANCE TECHNOLOGIES

Jim Simons of Renaissance Technologies

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a peek at the fresh hedge fund action regarding CARBO Ceramics Inc. (NYSE:CRR).

What have hedge funds been doing with CARBO Ceramics Inc. (NYSE:CRR)?

At Q3’s end, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from one quarter earlier. On the other hand, there were a total of 9 hedge funds with a bullish position in CRR a year ago. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Is CRR A Good Stock To Buy?

More specifically, Renaissance Technologies was the largest shareholder of CARBO Ceramics Inc. (NYSE:CRR), with a stake worth $5.4 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $2.6 million. Royce & Associates, Millennium Management, and Citadel Investment Group 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 Royce & Associates allocated the biggest weight to CARBO Ceramics Inc. (NYSE:CRR), around 0.01% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, earmarking 0.0046 percent of its 13F equity portfolio to CRR.

Since CARBO Ceramics Inc. (NYSE:CRR) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of hedgies that elected to cut their entire stakes heading into Q4. Intriguingly, Frederick DiSanto’s Ancora Advisors cut the biggest position of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $0.3 million in stock, and Donald Sussman’s Paloma Partners was right behind this move, as the fund cut about $0.1 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to CARBO Ceramics Inc. (NYSE:CRR). These stocks are Dynagas LNG Partners LP (NYSE:DLNG), Lipocine Inc (NASDAQ:LPCN), ESSA Pharma Inc. (NASDAQ:EPIX), and Endologix, Inc. (NASDAQ:ELGX). This group of stocks’ market caps match CRR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DLNG 1 48 -2
LPCN 3 1919 1
EPIX 3 17229 2
ELGX 5 4860 -3
Average 3 6014 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 3 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $9 million in CRR’s case. Endologix, Inc. (NASDAQ:ELGX) is the most popular stock in this table. On the other hand Dynagas LNG Partners LP (NYSE:DLNG) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks CARBO Ceramics Inc. (NYSE:CRR) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CRR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CRR were disappointed as the stock returned -82.9% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.

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

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