Hedge Funds Have Never Been This Bullish On Hess Midstream Partners LP (HESM)

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Hess Midstream Partners LP (NYSE:HESM).

Hess Midstream Partners LP (NYSE:HESM) was in 7 hedge funds’ portfolios at the end of the third quarter of 2019. HESM has seen an increase in hedge fund sentiment lately. There were 6 hedge funds in our database with HESM holdings at the end of the previous quarter. Our calculations also showed that HESM 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.

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 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 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.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

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. Keeping this in mind let’s analyze the fresh hedge fund action regarding Hess Midstream Partners LP (NYSE:HESM).

What does smart money think about Hess Midstream Partners LP (NYSE:HESM)?

At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HESM over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

The largest stake in Hess Midstream Partners LP (NYSE:HESM) was held by Arrowstreet Capital, which reported holding $4.6 million worth of stock at the end of September. It was followed by Marshall Wace with a $3.3 million position. Other investors bullish on the company included Citadel Investment Group, Lucas Capital Management, and Chiron Investment Management. In terms of the portfolio weights assigned to each position Lucas Capital Management allocated the biggest weight to Hess Midstream Partners LP (NYSE:HESM), around 0.44% of its 13F portfolio. Chiron Investment Management is also relatively very bullish on the stock, designating 0.04 percent of its 13F equity portfolio to HESM.

As one would reasonably expect, key money managers have been driving this bullishness. PEAK6 Capital Management, managed by Matthew Hulsizer, initiated the biggest call position in Hess Midstream Partners LP (NYSE:HESM). PEAK6 Capital Management had $0.1 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also made a $0 million investment in the stock during the quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Hess Midstream Partners LP (NYSE:HESM) but similarly valued. We will take a look at SecureWorks Corp. (NASDAQ:SCWX), Bitauto Hldg Ltd (NYSE:BITA), Inogen Inc (NASDAQ:INGN), and Blucora Inc (NASDAQ:BCOR). All of these stocks’ market caps are similar to HESM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SCWX 9 18937 0
BITA 13 72639 6
INGN 14 136246 -4
BCOR 14 99880 -2
Average 12.5 81926 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $9 million in HESM’s case. Inogen Inc (NASDAQ:INGN) is the most popular stock in this table. On the other hand SecureWorks Corp. (NASDAQ:SCWX) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Hess Midstream Partners LP (NYSE:HESM) is even less popular than SCWX. 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. A small number of hedge funds were also right about betting on HESM, though not to the same extent, as the stock returned 8.3% during the fourth quarter (through 11/30) and outperformed the market as well.

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