Is Natural Gas Services Group, Inc. (NGS) A Good Stock To Buy?

Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant out-performance. These stocks have been on a tear since the end of June, outperforming large-cap index funds by more than 10 percentage points. That’s why we pay special attention to hedge fund activity in these stocks.

Natural Gas Services Group, Inc. (NYSE:NGS) has experienced a decrease in activity from the world’s largest hedge funds lately. There were 10 hedge funds in our database with NGS holdings at the end of the second quarter, 1 more than there were a quarter later. At the end of this article we will also compare NGS to other stocks including THL Credit, Inc. (NASDAQ:TCRD), Del Frisco’s Restaurant Group Inc (NASDAQ:DFRG), and Homeowners Choice Inc (NYSE:HCI) to get a better sense of its popularity.

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 does the smart money think about Natural Gas Services Group, Inc. (NYSE:NGS)?

At Q3’s end, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a 10% decline from the previous quarter. The graph below displays the number of hedge funds with bullish positions in NGS over the last 5 quarters, which has remained nearly flat throughout the last year. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Spitfire Capital, led by Julian Allen, holds the largest position in Natural Gas Services Group, Inc. (NYSE:NGS). Spitfire Capital has a $10.4 million position in the stock, comprising 4.6% of its 13F portfolio. On Spitfire Capital’s heels is Renaissance Technologies, one of the largest hedge funds in the world, holding a $6.4 million position. Other hedge funds and institutional investors that hold long positions comprise Paul Hondros’ AlphaOne Capital Partners, Chuck Royce’s Royce & Associates, and David E. Shaw’s D E Shaw. 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-micro-cap stocks.

We view hedge fund activity in the stock as unfavorable, but in this case there was only a single hedge fund selling its entire position: Highbridge Capital Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 700+ hedge funds tracked by Insider Monkey identified NGS as a viable investment and initiated a position in the stock.

Let’s check out hedge fund activity in other stocks similar to Natural Gas Services Group, Inc. (NYSE:NGS). We will take a look at THL Credit, Inc. (NASDAQ:TCRD), Del Frisco’s Restaurant Group Inc (NASDAQ:DFRG), Homeowners Choice Inc (NYSE:HCI), and Emerge Energy Services LP (NYSE:EMES). This group of stocks’ market caps are similar to NGS’s market cap.

As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $30 million. That figure was $25 million in NGS’s case. Del Frisco’s Restaurant Group Inc (NASDAQ:DFRG) is the most popular stock in this table. On the other hand Emerge Energy Services LP (NYSE:EMES) is the least popular one with only 4 bullish hedge fund positions. Natural Gas Services Group, Inc. (NYSE:NGS) 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. In this regard DFRG might be a better candidate to consider taking a long position in.

Disclosure: None