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Is Chesapeake Energy Corporation (CHK) Going To Burn These Hedge Funds ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Chesapeake Energy Corporation (NYSE:CHK).

Is Chesapeake Energy Corporation (NYSE:CHK) an attractive investment today? Money managers are taking a bearish view. The number of long hedge fund bets went down by 2 lately. Our calculations also showed that CHK isn’t among the 30 most popular stocks among hedge funds (view the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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 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.

Joe Huber - Huber Capital Management

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s check out the recent hedge fund action regarding Chesapeake Energy Corporation (NYSE:CHK).

What have hedge funds been doing with Chesapeake Energy Corporation (NYSE:CHK)?

At Q2’s end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. By comparison, 19 hedge funds held shares or bullish call options in CHK a year ago. With hedgies’ sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

CHK_oct2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Millennium Management, managed by Israel Englander, holds the biggest position in Chesapeake Energy Corporation (NYSE:CHK). Millennium Management has a $62.9 million position in the stock, comprising 0.1% of its 13F portfolio. The second largest stake is held by Huber Capital Management, managed by Joe Huber, which holds a $17.4 million position; the fund has 2.1% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish encompass Ken Griffin’s Citadel Investment Group, and Dmitry Balyasny’s Balyasny Asset Management.

Judging by the fact that Chesapeake Energy Corporation (NYSE:CHK) has experienced falling interest from the smart money, it’s safe to say that there exists a select few hedge funds who sold off their positions entirely last quarter. Interestingly, Howard Marks’s Oaktree Capital Management dumped the largest stake of all the hedgies followed by Insider Monkey, worth about $11 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also sold off its stock, about $8.9 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 2 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Chesapeake Energy Corporation (NYSE:CHK). We will take a look at Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), CenterState Banks Inc (NASDAQ:CSFL), WNS (Holdings) Limited (NYSE:WNS), and Everbridge, Inc. (NASDAQ:EVBG). This group of stocks’ market valuations are similar to CHK’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ARNA 29 346300 7
CSFL 15 103667 -1
WNS 16 205494 1
EVBG 28 537005 -2
Average 22 298117 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $298 million. That figure was $96 million in CHK’s case. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is the most popular stock in this table. On the other hand CenterState Banks Inc (NASDAQ:CSFL) is the least popular one with only 15 bullish hedge fund positions. Chesapeake Energy Corporation (NYSE:CHK) is not the least popular stock in this group but hedge fund interest is still below average. 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately CHK wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CHK investors were disappointed as the stock returned -27.7% during the third 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 many of these stocks already outperformed the market so far in 2019.

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

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