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Should You Avoid Evolution Petroleum Corporation (EPM)?

In this article we will check out the progression of hedge fund sentiment towards Evolution Petroleum Corporation (NYSE:EPM) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Evolution Petroleum Corporation (NYSE:EPM) has seen a decrease in hedge fund interest of late. EPM was in 9 hedge funds’ portfolios at the end of the first quarter of 2020. There were 11 hedge funds in our database with EPM positions at the end of the previous quarter. Our calculations also showed that EPM isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

In the eyes of most stock holders, hedge funds are seen as slow, old investment tools of years past. While there are more than 8000 funds in operation at present, We hone in on the upper echelon of this group, about 850 funds. These money managers control the majority of the hedge fund industry’s total asset base, and by paying attention to their unrivaled stock picks, Insider Monkey has come up with a number of investment strategies that have historically outrun the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a gander at the recent hedge fund action regarding Evolution Petroleum Corporation (NYSE:EPM).

What does smart money think about Evolution Petroleum Corporation (NYSE:EPM)?

At Q1’s end, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in EPM a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Evolution Petroleum Corporation (NYSE:EPM), with a stake worth $6.2 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $0.8 million. GLG Partners, Two Sigma Advisors, and Winton Capital Management 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 HighVista Strategies allocated the biggest weight to Evolution Petroleum Corporation (NYSE:EPM), around 0.03% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to EPM.

Due to the fact that Evolution Petroleum Corporation (NYSE:EPM) has experienced bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there is a sect of hedge funds who sold off their entire stakes by the end of the first quarter. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP cut the largest position of the 750 funds watched by Insider Monkey, comprising about $0.3 million in stock. Thomas Bailard’s fund, Bailard Inc, also dumped its stock, about $0.2 million worth. These transactions are interesting, as total hedge fund interest was cut by 2 funds by the end of the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Evolution Petroleum Corporation (NYSE:EPM) but similarly valued. These stocks are DIRTT Environmental Solutions Ltd. (NASDAQ:DRTT), Aravive, Inc. (NASDAQ:ARAV), A-Mark Precious Metals, Inc. (NASDAQ:AMRK), and The Lovesac Company (NASDAQ:LOVE). This group of stocks’ market caps are closest to EPM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DRTT 10 15572 -2
ARAV 6 10926 -3
AMRK 4 1476 1
LOVE 7 6858 0
Average 6.75 8708 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $9 million. That figure was $8 million in EPM’s case. DIRTT Environmental Solutions Ltd. (NASDAQ:DRTT) is the most popular stock in this table. On the other hand A-Mark Precious Metals, Inc. (NASDAQ:AMRK) is the least popular one with only 4 bullish hedge fund positions. Evolution Petroleum Corporation (NYSE:EPM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.4% in 2020 through June 22nd but beat the market by 15.9 percentage points. Unfortunately EPM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EPM were disappointed as the stock returned 8.3% during the same time 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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