How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Matador Resources Co (NYSE:MTDR).
Is MTDR a good stock to buy now? The smart money was taking a bearish view. The number of bullish hedge fund positions decreased by 7 in recent months. Matador Resources Co (NYSE:MTDR) was in 16 hedge funds’ portfolios at the end of September. The all time high for this statistic is 23. Our calculations also showed that MTDR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: 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 S&P 500 ETFs by 66 percentage points since March 2017 (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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind we’re going to review the recent hedge fund action regarding Matador Resources Co (NYSE:MTDR).
Do Hedge Funds Think MTDR Is A Good Stock To Buy Now?
At the end of September, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -30% from the second quarter of 2020. By comparison, 16 hedge funds held shares or bullish call options in MTDR a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Arrowstreet Capital was the largest shareholder of Matador Resources Co (NYSE:MTDR), with a stake worth $21 million reported as of the end of September. Trailing Arrowstreet Capital was D E Shaw, which amassed a stake valued at $14.8 million. Two Sigma Advisors, Royce & Associates, and Value Holdings LP 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 Value Holdings LP allocated the biggest weight to Matador Resources Co (NYSE:MTDR), around 1.65% of its 13F portfolio. SIR Capital Management is also relatively very bullish on the stock, dishing out 0.68 percent of its 13F equity portfolio to MTDR.
Because Matador Resources Co (NYSE:MTDR) has witnessed falling interest from the smart money, it’s easy to see that there lies a certain “tier” of money managers who were dropping their entire stakes last quarter. It’s worth mentioning that Cliff Asness’s AQR Capital Management cut the biggest position of all the hedgies tracked by Insider Monkey, totaling an estimated $24 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund said goodbye to about $2.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 7 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Matador Resources Co (NYSE:MTDR) but similarly valued. We will take a look at New York Mortgage Trust, Inc. (NASDAQ:NYMT), Atara Biotherapeutics Inc (NASDAQ:ATRA), Constellation Pharmaceuticals, Inc. (NASDAQ:CNST), Greenbrier Companies Inc (NYSE:GBX), Oak Street Health, Inc. (NYSE:OSH), Encore Wire Corporation (NASDAQ:WIRE), and Corecivic Inc. (NYSE:CXW). This group of stocks’ market caps are closest to MTDR’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.7 hedge funds with bullish positions and the average amount invested in these stocks was $193 million. That figure was $69 million in MTDR’s case. Constellation Pharmaceuticals, Inc. (NASDAQ:CNST) is the most popular stock in this table. On the other hand Greenbrier Companies Inc (NYSE:GBX) is the least popular one with only 14 bullish hedge fund positions. Matador Resources Co (NYSE:MTDR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MTDR is 27.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. A small number of hedge funds were also right about betting on MTDR as the stock returned 47.7% since the end of the third quarter (through 12/14) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.