While many hedge funds are still preparing their third quarter filings with the SEC, providing the main ingredients for our delectable small-cap investment strategy, some managers are already disclosing even more recent moves. The latest wave of filings includes two oil and gas companies, and one biotech stock. Let’s analyze the deals and also how other hedge funds are positioned with regard to these stocks.
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35%-to-45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned 102% over the ensuing 37 months, outperforming the S&P 500 Index by over 53 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
John H. Scully has decided to further reduce his exposure to Resolute Energy Corp (NYSE:REN), with his fund, SPO Advisory Corp having reported the disposal of 2 million shares in a recent Form 4 filing with the Securities and Exchange Commission. As a result, the fund now holds approximately 14.9 million shares, the equivalent of 19.3% of the company’s common stock. Resolute Energy Corp (NYSE:REN) gained popularity among top hedge funds during the second quarter, with the number of funds reporting long positions in the stock as of the end of June increasing to 15, while their combined holdings accounted for 40% of Resolute’s outstanding stock. Edward Gilhuly and Scott Stuart, the managers of Sageview Capital, are also betting big on Resolute Energy, having reported ownership of 5.07 million shares as of the end of the second quarter.
Resolute Energy Corp (NYSE:REN) has been a terrible performer so far this year, having lost nearly 62% of its value year-to-date. The stock has been severely hit by the slump in the energy market, having traded around the $8 level in July 2014 before oil prices started to slide. Revenues were also affected, with Resolute Energy reporting $48.4 million in revenues for the second quarter of 2015, down by 45% year-over-year, and a loss of $0.66 per share, triple the loss reported for the second quarter of 2014. Analysts expect the situation to improve however, having estimated revenues of $54.9 million and a loss of $0.12 per share for the current quarter, with Resolute Energy set to release its latest financial report on November 9.