Is Bonanza Creek Energy Inc (BCEI) Going To Burn These Hedge Funds ?

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 Bonanza Creek Energy Inc (NYSE:BCEI).

Bonanza Creek Energy Inc (NYSE:BCEI) investors should pay attention to an increase in activity from the world’s largest hedge funds lately. BCEI was in 21 hedge funds’ portfolios at the end of the third quarter of 2019. There were 15 hedge funds in our database with BCEI positions at the end of the previous quarter. Our calculations also showed that BCEI 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.

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 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. 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.

Paul Reeder PAR Capital Management

Paul Reeder of PAR Capital Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the recent hedge fund action encompassing Bonanza Creek Energy Inc (NYSE:BCEI).

How are hedge funds trading Bonanza Creek Energy Inc (NYSE:BCEI)?

At the end of the third quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 40% from one quarter earlier. By comparison, 16 hedge funds held shares or bullish call options in BCEI a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Mangrove Partners held the most valuable stake in Bonanza Creek Energy Inc (NYSE:BCEI), which was worth $45.3 million at the end of the third quarter. On the second spot was Oaktree Capital Management which amassed $28.7 million worth of shares. Royce & Associates, Brigade Capital, and PAR Capital Management 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 Venor Capital Management allocated the biggest weight to Bonanza Creek Energy Inc (NYSE:BCEI), around 8.44% of its 13F portfolio. Mangrove Partners is also relatively very bullish on the stock, earmarking 5.48 percent of its 13F equity portfolio to BCEI.

Now, some big names have jumped into Bonanza Creek Energy Inc (NYSE:BCEI) headfirst. Marshall Wace, managed by Paul Marshall and Ian Wace, initiated the most valuable position in Bonanza Creek Energy Inc (NYSE:BCEI). Marshall Wace had $2.6 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $1.1 million position during the quarter. The following funds were also among the new BCEI investors: Cliff Asness’s AQR Capital Management, Bruce Kovner’s Caxton Associates, and Michael Gelband’s ExodusPoint Capital.

Let’s now review hedge fund activity in other stocks similar to Bonanza Creek Energy Inc (NYSE:BCEI). These stocks are Beazer Homes USA, Inc. (NYSE:BZH), Exterran Corporation (NYSE:EXTN), OraSure Technologies, Inc. (NASDAQ:OSUR), and Capital City Bank Group, Inc. (NASDAQ:CCBG). This group of stocks’ market caps match BCEI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BZH 15 49612 8
EXTN 18 46058 4
OSUR 19 82277 2
CCBG 3 8944 0
Average 13.75 46723 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $47 million. That figure was $145 million in BCEI’s case. OraSure Technologies, Inc. (NASDAQ:OSUR) is the most popular stock in this table. On the other hand Capital City Bank Group, Inc. (NASDAQ:CCBG) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Bonanza Creek Energy Inc (NYSE:BCEI) 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 BCEI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on BCEI were disappointed as the stock returned -22% 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.