Here is What Hedge Funds Think About Arco Platform Limited (ARCE)

In this article you are going to find out whether hedge funds think Arco Platform Limited (NASDAQ:ARCE) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Arco Platform Limited (NASDAQ:ARCE) has experienced a decrease in hedge fund sentiment lately. ARCE was in 16 hedge funds’ portfolios at the end of the first quarter of 2020. There were 17 hedge funds in our database with ARCE positions at the end of the previous quarter. Our calculations also showed that ARCE isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 S&P 500 ETFs by more than 58 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 PayPal alternatives for international payments to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a glance at the fresh hedge fund action surrounding Arco Platform Limited (NASDAQ:ARCE).

How are hedge funds trading Arco Platform Limited (NASDAQ:ARCE)?

At the end of the first quarter, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the fourth quarter of 2019. By comparison, 11 hedge funds held shares or bullish call options in ARCE a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Christopher Lyle’s SCGE Management has the largest position in Arco Platform Limited (NASDAQ:ARCE), worth close to $54.9 million, amounting to 1.7% of its total 13F portfolio. The second most bullish fund manager is Cartica Management, managed by Teresa Barger, which holds a $31 million position; the fund has 25.3% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism comprise Beeneet Kothari’s Tekne Capital Management, Carl Anderson’s Marcho Partners and Richard Driehaus’s Driehaus Capital. In terms of the portfolio weights assigned to each position Cartica Management allocated the biggest weight to Arco Platform Limited (NASDAQ:ARCE), around 25.29% of its 13F portfolio. Tekne Capital Management is also relatively very bullish on the stock, setting aside 8.44 percent of its 13F equity portfolio to ARCE.

Because Arco Platform Limited (NASDAQ:ARCE) has experienced bearish sentiment from the smart money, it’s easy to see that there was a specific group of fund managers who sold off their positions entirely in the first quarter. Intriguingly, Anand Parekh’s Alyeska Investment Group cut the largest position of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $11.9 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund said goodbye to about $1.4 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 1 funds in the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Arco Platform Limited (NASDAQ:ARCE) but similarly valued. These stocks are Premier Inc (NASDAQ:PINC), Kinsale Capital Group, Inc. (NASDAQ:KNSL), Foot Locker, Inc. (NYSE:FL), and South Jersey Industries Inc (NYSE:SJI). All of these stocks’ market caps are closest to ARCE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PINC 17 190749 3
KNSL 7 24342 -4
FL 21 147084 -8
SJI 13 88904 -5
Average 14.5 112770 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $113 million. That figure was $145 million in ARCE’s case. Foot Locker, Inc. (NYSE:FL) is the most popular stock in this table. On the other hand Kinsale Capital Group, Inc. (NASDAQ:KNSL) is the least popular one with only 7 bullish hedge fund positions. Arco Platform Limited (NASDAQ:ARCE) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately ARCE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ARCE were disappointed as the stock returned 4.1% 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.

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