We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Alliance Resource Partners, L.P. (NASDAQ:ARLP).
Alliance Resource Partners, L.P. (NASDAQ:ARLP) shareholders have witnessed an increase in support from the world’s most elite money managers of late. Our calculations also showed that ARLP isn’t among the 30 most popular stocks among hedge funds (see the video below).
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’ 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 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 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.
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. Let’s take a look at the latest hedge fund action surrounding Alliance Resource Partners, L.P. (NASDAQ:ARLP).
How have hedgies been trading Alliance Resource Partners, L.P. (NASDAQ:ARLP)?
At the end of the second quarter, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the previous quarter. By comparison, 8 hedge funds held shares or bullish call options in ARLP a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, Magnolia Capital Fund was the largest shareholder of Alliance Resource Partners, L.P. (NASDAQ:ARLP), with a stake worth $52.5 million reported as of the end of March. Trailing Magnolia Capital Fund was Mountain Lake Investment Management, which amassed a stake valued at $21.4 million. Royce & Associates, Arrowstreet Capital, and Renaissance Technologies were also very fond of the stock, giving the stock large weights in their portfolios.
As aggregate interest increased, specific money managers have jumped into Alliance Resource Partners, L.P. (NASDAQ:ARLP) headfirst. Royce & Associates, managed by Chuck Royce, created the biggest position in Alliance Resource Partners, L.P. (NASDAQ:ARLP). Royce & Associates had $13.5 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $0.5 million position during the quarter. The other funds with new positions in the stock are Matthew Hulsizer’s PEAK6 Capital Management and Matthew Hulsizer’s PEAK6 Capital Management.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Alliance Resource Partners, L.P. (NASDAQ:ARLP) but similarly valued. We will take a look at Inovalon Holdings Inc (NASDAQ:INOV), Lexington Realty Trust (NYSE:LXP), Arco Platform Limited (NASDAQ:ARCE), and Adient plc (NYSE:ADNT). This group of stocks’ market valuations are closest to ARLP’s market valuation.
|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 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $183 million. That figure was $103 million in ARLP’s case. Adient plc (NYSE:ADNT) is the most popular stock in this table. On the other hand Inovalon Holdings Inc (NASDAQ:INOV) is the least popular one with only 7 bullish hedge fund positions. Alliance Resource Partners, L.P. (NASDAQ:ARLP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately ARLP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ARLP investors were disappointed as the stock returned -2.6% 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.