Is Chaparral Energy, Inc. (CHAP) A Good Stock To Buy?

The first quarter was a breeze as Powell pivoted, and China seemed eager to reach a deal with Trump. Both the S&P 500 and Russell 2000 delivered very strong gains as a result, with the Russell 2000, which is composed of smaller companies, outperforming the large-cap stocks slightly during the first quarter. Unfortunately sentiment shifted in May as this time China pivoted and Trump put more pressure on China by increasing tariffs. Hedge funds’ top 20 stock picks performed spectacularly in this volatile environment. These stocks delivered a total gain of 18.7% through May 30th, vs. a gain of 12.1% for the S&P 500 ETF. In this article we will look at how this market volatility affected the sentiment of hedge funds towards Chaparral Energy, Inc. (NYSE:CHAP), and what that likely means for the prospects of the company and its stock.

Is Chaparral Energy, Inc. (NYSE:CHAP) a bargain? The smart money is becoming less confident. The number of long hedge fund positions shrunk by 1 lately. Our calculations also showed that chap isn’t among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jeffrey Tannenbaum, Fir Tree

Let’s view the latest hedge fund action encompassing Chaparral Energy, Inc. (NYSE:CHAP).

What does smart money think about Chaparral Energy, Inc. (NYSE:CHAP)?

At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CHAP over the last 15 quarters. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

No of Hedge Funds with CHAP Positions

More specifically, Silver Point Capital was the largest shareholder of Chaparral Energy, Inc. (NYSE:CHAP), with a stake worth $25.2 million reported as of the end of March. Trailing Silver Point Capital was Contrarian Capital, which amassed a stake valued at $21.6 million. Strategic Value Partners, Fir Tree, and Knighthead Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Chaparral Energy, Inc. (NYSE:CHAP) has faced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of money managers that slashed their full holdings in the third quarter. Interestingly, Ken Griffin’s Citadel Investment Group said goodbye to the biggest investment of the 700 funds followed by Insider Monkey, worth about $8 million in stock, and Karim Abbadi and Edward McBride’s Centiva Capital was right behind this move, as the fund sold off about $0.1 million worth. These transactions are interesting, as total hedge fund interest fell by 1 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Chaparral Energy, Inc. (NYSE:CHAP) but similarly valued. We will take a look at Marlin Business Services Corp. (NASDAQ:MRLN), Gold Standard Ventures Corp (NYSE:GSV), SmartFinancial, Inc. (NASDAQ:SMBK), and Bel Fuse, Inc. (NASDAQ:BELFA). This group of stocks’ market values are similar to CHAP’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MRLN 5 85316 0
GSV 3 1129 -3
SMBK 6 23070 1
BELFA 4 8713 0
Average 4.5 29557 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $30 million. That figure was $100 million in CHAP’s case. SmartFinancial, Inc. (NASDAQ:SMBK) is the most popular stock in this table. On the other hand Gold Standard Ventures Corp (NYSE:GSV) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Chaparral Energy, Inc. (NYSE:CHAP) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately CHAP wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CHAP were disappointed as the stock returned -40% during the same 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market in Q2.

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