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Is Independence Contract Drilling Inc (ICD) Going To Burn These Hedge Funds ?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. 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  Independence Contract Drilling Inc (NYSE:ICD).

Is Independence Contract Drilling Inc (NYSE:ICD) undervalued? The smart money is turning bullish. The number of long hedge fund positions improved by 2 recently. Our calculations also showed that ICD isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ICD was in 12 hedge funds’ portfolios at the end of September. There were 10 hedge funds in our database with ICD holdings at the end of the previous quarter.
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 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.

Chuck Royce

Chuck Royce of Royce & Associates

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy  based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s take a look at the recent hedge fund action surrounding Independence Contract Drilling Inc (NYSE:ICD).

How have hedgies been trading Independence Contract Drilling Inc (NYSE:ICD)?

At Q3’s end, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from the second quarter of 2019. By comparison, 10 hedge funds held shares or bullish call options in ICD a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

The largest stake in Independence Contract Drilling Inc (NYSE:ICD) was held by MSDC Management, which reported holding $22.6 million worth of stock at the end of September. It was followed by MSD Capital with a $5.4 million position. Other investors bullish on the company included Birch Grove Capital, Adage Capital Management, and Royce & Associates. In terms of the portfolio weights assigned to each position Axar Capital allocated the biggest weight to Independence Contract Drilling Inc (NYSE:ICD), around 6.52% of its 13F portfolio. Birch Grove Capital is also relatively very bullish on the stock, dishing out 3.79 percent of its 13F equity portfolio to ICD.

As industrywide interest jumped, key money managers have jumped into Independence Contract Drilling Inc (NYSE:ICD) headfirst. Nokomis Capital, managed by Brett Hendrickson, assembled the most outsized position in Independence Contract Drilling Inc (NYSE:ICD). Nokomis Capital had $2.4 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $0 million position during the quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Independence Contract Drilling Inc (NYSE:ICD) but similarly valued. We will take a look at Cumberland Pharmaceuticals, Inc. (NASDAQ:CPIX), Four Seasons Education (Cayman) Inc. (NYSE:FEDU), TransAct Technologies Incorporated (NASDAQ:TACT), and Profire Energy, Inc. (NASDAQ:PFIE). This group of stocks’ market valuations match ICD’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CPIX 3 8535 0
FEDU 4 5149 -1
TACT 5 9234 -1
PFIE 8 8100 -1
Average 5 7755 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $44 million in ICD’s case. Profire Energy, Inc. (NASDAQ:PFIE) is the most popular stock in this table. On the other hand Cumberland Pharmaceuticals, Inc. (NASDAQ:CPIX) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Independence Contract Drilling Inc (NYSE:ICD) 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 ICD wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ICD were disappointed as the stock returned -34.2% 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.

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