Should You Avoid LSB Industries, Inc. (LXU)?

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.

Is LSB Industries, Inc. (NYSE:LXU) ready to rally soon? Investors who are in the know are categorically in a bearish mood. The number of long hedge fund positions that are disclosed in regulatory 13F filings retreated by 1 recently. There were 8 hedge funds in our database with LXU holdings at the end of September. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Star Bulk Carriers Corp. (NASDAQ:SBLK), Tabula Rasa HealthCare Inc (NASDAQ:TRHC), and Hill International Inc (NYSE:HIL) to gather more data points.

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.

Now, let’s take a look at the fresh action regarding LSB Industries, Inc. (NYSE:LXU).

What have hedge funds been doing with LSB Industries, Inc. (NYSE:LXU)?

At the end of the third quarter, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a drop of 11% from the second quarter of 2016. By comparison, 13 hedge funds held shares or bullish call options in LXU heading into this year. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Tontine Asset Management, led by Jeffrey Gendell, holds the largest position in LSB Industries, Inc. (NYSE:LXU). According to regulatory filings, the fund has a $12 million position in the stock, comprising 1.8% of its 13F portfolio. Coming in second is Derek C. Schrier of Indaba Capital Management, with a $9.6 million position; 3.8% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that are bullish contain Murray Stahl’s Horizon Asset Management, Renaissance Technologies, one of the largest hedge funds in the world, and Chuck Royce’s Royce & Associates. 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-microcap stocks.

Because LSB Industries, Inc. (NYSE:LXU) has weathered a decline in interest from the entirety of the hedge funds we track, logic holds that there exists a select few hedge funds who were dropping their positions entirely last quarter. Intriguingly, William Charters and Mario Marcon’s Sabal Capital Management cashed in the biggest stake of the 700 funds followed by Insider Monkey, comprising close to $1.2 million in stock, and Dan Sobol and Lisa Hess’s SkyTop Capital Management was right behind this move, as the fund dropped about $0.8 million worth of shares.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as LSB Industries, Inc. (NYSE:LXU) but similarly valued. We will take a look at Star Bulk Carriers Corp. (NASDAQ:SBLK), Tabula Rasa HealthCare Inc (NASDAQ:TRHC), Hill International Inc (NYSE:HIL), and Exa Corp (NASDAQ:EXA). This group of stocks’ market valuations match LXU’s market valuation.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $57 million. That figure was $31 million in LXU’s case. Hill International Inc (NYSE:HIL) is the most popular stock in this table. On the other hand Star Bulk Carriers Corp. (NASDAQ:SBLK) is the least popular one with only 6 bullish hedge fund positions. LSB Industries, Inc. (NYSE:LXU) 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. In this regard HIL might be a better candidate to consider taking a long position in.

Disclosure: None