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Should You Buy Argan, Inc. (AGX)?

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards Argan, Inc. (NYSE:AGX), and what that likely means for the prospects of the company and its stock.

Argan, Inc. (NYSE:AGX) was in 17 hedge funds’ portfolios at the end of the third quarter of 2016. AGX has seen an increase in enthusiasm from smart money lately as there were 13 hedge funds in our database with AGX positions at the end of the previous quarter. 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 FelCor Lodging Trust Incorporated (NYSE:FCH), Cavco Industries, Inc. (NASDAQ:CVCO), and Eros International plc (NYSE:EROS) to gather more data points.

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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.

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Keeping this in mind, let’s review the key action surrounding Argan, Inc. (NYSE:AGX).

What have hedge funds been doing with Argan, Inc. (NYSE:AGX)?

At Q3’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, an increase of 31% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in AGX heading into this 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.

AGX Chart

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, one of the largest hedge funds in the world, has the biggest position in Argan, Inc. (NYSE:AGX), worth close to $55.3 million, comprising 0.1% of its total 13F portfolio. Coming in second is Huber Capital Management, led by Joe Huber, holding a $11.2 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish contain Joel Greenblatt’s Gotham Asset Management, Leighton Welch’s Welch Capital Partners and John Overdeck and David Siegel’s Two Sigma Advisors. 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.

As industrywide interest jumped, some big names have been driving this bullishness. Welch Capital Partners, led by Leighton Welch, initiated the most valuable position in Argan, Inc. (NYSE:AGX). According to its latest 13F filing, the fund had $6.8 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also initiated a $5.6 million position during the quarter. The following funds were also among the new AGX investors: Chuck Royce’s Royce & Associates, George Hall’s Clinton Group, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Argan, Inc. (NYSE:AGX) but similarly valued. We will take a look at FelCor Lodging Trust Incorporated (NYSE:FCH), Cavco Industries, Inc. (NASDAQ:CVCO), Eros International plc (NYSE:EROS), and Noble Midstream Partners LP (NYSE:NBLX). All of these stocks’ market caps resemble AGX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FCH 17 122725 -4
CVCO 13 166370 -3
EROS 8 40946 1
NBLX 4 26092 4

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $89 million. That figure was $108 million in AGX’s case. FelCor Lodging Trust Incorporated (NYSE:FCH) is the most popular stock in this table. On the other hand Noble Midstream Partners LP (NYSE:NBLX) is the least popular one with only 4 bullish hedge fund positions. Argan, Inc. (NYSE:AGX) 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 FCH might be a better candidate to consider taking a long position in.

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Disclosure: None