Is ARCE A Good Stock To Buy Now?

In this article we are going to use hedge fund sentiment as a tool and determine whether Arco Platform Limited (NASDAQ:ARCE) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is ARCE a good stock to buy now? Arco Platform Limited (NASDAQ:ARCE) investors should pay attention to a decrease in hedge fund sentiment of late. Arco Platform Limited (NASDAQ:ARCE) was in 14 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 25. There were 25 hedge funds in our database with ARCE holdings at the end of June. Our calculations also showed that ARCE isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 113% since March 2017 and outperformed the S&P 500 ETFs by more than 66 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Stan Druckenmiller DUQUESNE CAPITAL

Stanley Druckenmiller of Duquesne Capital

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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind we’re going to view the new hedge fund action surrounding Arco Platform Limited (NASDAQ:ARCE).

Do Hedge Funds Think ARCE Is A Good Stock To Buy Now?

At Q3’s end, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -44% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ARCE over the last 21 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Cartica Management was the largest shareholder of Arco Platform Limited (NASDAQ:ARCE), with a stake worth $44.9 million reported as of the end of September. Trailing Cartica Management was Tekne Capital Management, which amassed a stake valued at $31.4 million. Marcho Partners, Shannon River Fund Management, and ThornTree Capital Partners 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 Cartica Management allocated the biggest weight to Arco Platform Limited (NASDAQ:ARCE), around 14.61% of its 13F portfolio. Tekne Capital Management is also relatively very bullish on the stock, setting aside 5.91 percent of its 13F equity portfolio to ARCE.

Because Arco Platform Limited (NASDAQ:ARCE) has witnessed falling interest from hedge fund managers, it’s safe to say that there is a sect of money managers that slashed their positions entirely last quarter. At the top of the heap, Christopher Lyle’s SCGE Management dumped the largest stake of the “upper crust” of funds watched by Insider Monkey, comprising close to $30.2 million in stock. Richard Driehaus’s fund, Driehaus Capital, also sold off its stock, about $11.3 million worth. These transactions are important to note, as total hedge fund interest dropped by 11 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Arco Platform Limited (NASDAQ:ARCE). These stocks are Strategic Education Inc (NASDAQ:STRA), GATX Corporation (NYSE:GATX), Pactiv Evergreen Inc. (NASDAQ:PTVE), Xencor Inc (NASDAQ:XNCR), Shenandoah Telecommunications Company (NASDAQ:SHEN), Golub Capital BDC Inc (NASDAQ:GBDC), and Glaukos Corporation (NYSE:GKOS). This group of stocks’ market values resemble ARCE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
STRA 23 140362 2
GATX 10 144249 -7
PTVE 15 54939 15
XNCR 18 301062 -1
SHEN 9 85112 1
GBDC 11 33376 -5
GKOS 15 126038 -3
Average 14.4 126448 0.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.4 hedge funds with bullish positions and the average amount invested in these stocks was $126 million. That figure was $143 million in ARCE’s case. Strategic Education Inc (NASDAQ:STRA) is the most popular stock in this table. On the other hand Shenandoah Telecommunications Company (NASDAQ:SHEN) is the least popular one with only 9 bullish hedge fund positions. Arco Platform Limited (NASDAQ:ARCE) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ARCE is 28.7. 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 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and surpassed the market again by 16.2 percentage points. Unfortunately ARCE wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ARCE investors were disappointed as the stock returned -7.1% since the end of September (through 12/8) 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 most of these stocks already outperformed the market in 2020.

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