Was The Smart Money Right About Warrior Met Coal, Inc. (HCC)?

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 these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Warrior Met Coal, Inc. (NYSE:HCC)? The smart money sentiment can provide an answer to this question.

Hedge fund interest in Warrior Met Coal, Inc. (NYSE:HCC) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Nexa Resources S.A. (NYSE:NEXA), OneSmart International Education Group Limited (NYSE:ONE), and Meridian Bancorp, Inc. (NASDAQ:EBSB) to gather more data points. Our calculations also showed that HCC 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).

Martin Whitman Third Avenue Management Marty Whitman

Martin Whitman of Third Avenue 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. Keeping this in mind we’re going to analyze the new hedge fund action encompassing Warrior Met Coal, Inc. (NYSE:HCC).

What have hedge funds been doing with Warrior Met Coal, Inc. (NYSE:HCC)?

At the end of the fourth quarter, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in HCC over the last 18 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Renaissance Technologies has the most valuable position in Warrior Met Coal, Inc. (NYSE:HCC), worth close to $61.4 million, comprising less than 0.1%% of its total 13F portfolio. Coming in second is Third Avenue Management, managed by Martin Whitman, which holds a $37.8 million position; the fund has 3.7% of its 13F portfolio invested in the stock. Other professional money managers that are bullish include Ken Griffin’s Citadel Investment Group, Steven Tananbaum’s GoldenTree Asset Management and Kerr Neilson’s Platinum Asset Management. In terms of the portfolio weights assigned to each position Third Avenue Management allocated the biggest weight to Warrior Met Coal, Inc. (NYSE:HCC), around 3.74% of its 13F portfolio. GoldenTree Asset Management is also relatively very bullish on the stock, setting aside 2.63 percent of its 13F equity portfolio to HCC.

Since Warrior Met Coal, Inc. (NYSE:HCC) has experienced falling interest from the entirety of the hedge funds we track, logic holds that there exists a select few funds that elected to cut their positions entirely by the end of the third quarter. Interestingly, Jonathan Barrett and Paul Segal’s Luminus Management cut the biggest position of the “upper crust” of funds monitored by Insider Monkey, totaling close to $24.3 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also dumped its stock, about $12.6 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Warrior Met Coal, Inc. (NYSE:HCC) but similarly valued. We will take a look at Nexa Resources S.A. (NYSE:NEXA), OneSmart International Education Group Limited (NYSE:ONE), Meridian Bancorp, Inc. (NASDAQ:EBSB), and HeadHunter Group PLC (NASDAQ:HHR). This group of stocks’ market valuations are similar to HCC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NEXA 5 5135 -2
ONE 8 71081 0
EBSB 12 94607 1
HHR 6 62887 -2
Average 7.75 58428 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $58 million. That figure was $255 million in HCC’s case. Meridian Bancorp, Inc. (NASDAQ:EBSB) 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. Compared to these stocks Warrior Met Coal, Inc. (NYSE:HCC) is more popular among hedge funds. 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 and still beat the market by 12.9 percentage points. Unfortunately HCC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HCC were disappointed as the stock returned -45.9% during the four months of 2020 (through May 1st) 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 most of these stocks already outperformed the market in 2020.
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.