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Was The Smart Money Right About Arch Coal, Inc. (ARCH)?

Hedge funds don’t get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don’t realize is that 100% of the passive funds didn’t see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. In this article we will take a look at hedge funds’ collective moves over the last 4 years and analyze what the smart money thinks of Arch Coal, Inc. (NYSE:ARCH) based on that data.

Is Arch Coal, Inc. (NYSE:ARCH) a superb investment now? The best stock pickers are becoming less hopeful. The number of long hedge fund positions were cut by 1 recently. Our calculations also showed that ARCH isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). ARCH was in 26 hedge funds’ portfolios at the end of December. There were 27 hedge funds in our database with ARCH positions at the end of the previous quarter.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

James Dondero Highland Capital Management

James Dondero of Highland Capital Management

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with high accuracy, so we check out his stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to go over the latest hedge fund action surrounding Arch Coal, Inc. (NYSE:ARCH).

How have hedgies been trading Arch Coal, Inc. (NYSE:ARCH)?

At Q4’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the third quarter of 2019. On the other hand, there were a total of 25 hedge funds with a bullish position in ARCH a year ago. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

More specifically, Citadel Investment Group was the largest shareholder of Arch Coal, Inc. (NYSE:ARCH), with a stake worth $31.1 million reported as of the end of September. Trailing Citadel Investment Group was Highland Capital Management, which amassed a stake valued at $28.8 million. Skylands Capital, Luminus Management, and Arrowstreet Capital 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 Skylands Capital allocated the biggest weight to Arch Coal, Inc. (NYSE:ARCH), around 3.81% of its 13F portfolio. Anchor Bolt Capital is also relatively very bullish on the stock, dishing out 3.51 percent of its 13F equity portfolio to ARCH.

Due to the fact that Arch Coal, Inc. (NYSE:ARCH) has experienced a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of money managers that decided to sell off their full holdings by the end of the third quarter. It’s worth mentioning that Michael Weinstock’s Monarch Alternative Capital dropped the largest investment of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $73.2 million in stock. Alexander Mitchell’s fund, Scopus Asset Management, also said goodbye to its stock, about $6.4 million worth. These transactions are interesting, as total hedge fund interest was cut by 1 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Arch Coal, Inc. (NYSE:ARCH) but similarly valued. We will take a look at Warrior Met Coal, Inc. (NYSE:HCC), Nexa Resources S.A. (NYSE:NEXA), OneSmart International Education Group Limited (NYSE:ONE), and Meridian Bancorp, Inc. (NASDAQ:EBSB). This group of stocks’ market values match ARCH’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HCC 29 254959 0
NEXA 5 5135 -2
ONE 8 71081 0
EBSB 12 94607 1
Average 13.5 106446 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $106 million. That figure was $198 million in ARCH’s case. Warrior Met Coal, Inc. (NYSE:HCC) is the most popular stock in this table. On the other hand Nexa Resources S.A. (NYSE:NEXA) is the least popular one with only 5 bullish hedge fund positions. Arch Coal, Inc. (NYSE:ARCH) 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately ARCH wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ARCH were disappointed as the stock returned -62.2% 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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