Is Carlyle Group LP (CG) A Bad Stock To Buy?

At Insider Monkey we follow around 740 of the top investors and even though many of them underperformed the raging bull market, the history teaches us that over the long-run they still manage to beat the market after adjusting for risk, which is why it can be profitable for us to imitate their activity. Of course, even the best money managers can sometimes get it wrong, but following their best picks gives us a better chance to outperform the crowd than picking a random stock and this is where our research comes in.

Carlyle Group LP (NASDAQ:CG) was in 11 hedge funds’ portfolios at the end of September. CG shareholders have witnessed an increase in enthusiasm from smart money lately. There were 10 hedge funds in our database with CG positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Royal Gold, Inc USA) (NASDAQ:RGLD), Scotts Miracle-Gro Co (NYSE:SMG), and Weatherford International Ltd (NYSE:WFT) to gather more data points.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

What have hedge funds been doing with Carlyle Group LP (NASDAQ:CG)?

At the end of the third quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a 10% rise from the second quarter of 2016. On the other hand, there were a total of 9 hedge funds with a bullish position in CG at the beginning of this year, which is up by 22% in 2016. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Ahmet Okumus’ Okumus Fund Management has the number one position in Carlyle Group LP (NASDAQ:CG), worth close to $60.5 million, amounting to 13.6% of its total 13F portfolio. The second largest stake is held by Russell Hawkins of Hawkins Capital, with a $10.5 million position; the fund has 3.4% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism consist of Tom Gayner’s Markel Gayner Asset Management, Eric Halet and Davide Serra’s Algebris Investments, and Chuck Royce’s Royce & Associates. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As one would reasonably expect, specific money managers have been driving this bullishness. McKinley Capital Management, led by Robert B. Gillam, initiated the biggest position in Carlyle Group LP (NASDAQ:CG). McKinley Capital Management had $1.4 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $0.6 million position during the quarter, the only other fund with a brand new CG position.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Carlyle Group LP (NASDAQ:CG) but similarly valued. These stocks are Royal Gold, Inc USA) (NASDAQ:RGLD), Scotts Miracle-Gro Co (NYSE:SMG), Weatherford International Ltd (NYSE:WFT), and Gentex Corporation (NASDAQ:GNTX). This group of stocks’ market values are similar to CG’s market value.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $308 million. That figure was $91 million in CG’s case. Weatherford International Ltd (NYSE:WFT) is the most popular stock in this table. On the other hand Royal Gold, Inc USA) (NASDAQ:RGLD) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Carlyle Group LP (NASDAQ:CG) is even less popular than RGLD. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None