Were Hedge Funds Right About CNX Midstream Partners LP (CNXM)?

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. With this in mind let’s see whether CNX Midstream Partners LP (NYSE:CNXM) makes for a good investment at the moment.

CNX Midstream Partners LP (NYSE:CNXM) has experienced a decrease in support from the world’s most elite money managers in recent months. Our calculations also showed that CNXM 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).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

T Boone Pickens

T Boone Pickens of BP Capital

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 let’s view the recent hedge fund action surrounding CNX Midstream Partners LP (NYSE:CNXM).

Hedge fund activity in CNX Midstream Partners LP (NYSE:CNXM)

At the end of the fourth quarter, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CNXM over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in CNX Midstream Partners LP (NYSE:CNXM) was held by Arrowstreet Capital, which reported holding $14 million worth of stock at the end of September. It was followed by BP Capital with a $2.3 million position. Other investors bullish on the company included Citadel Investment Group, PEAK6 Capital Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position BP Capital allocated the biggest weight to CNX Midstream Partners LP (NYSE:CNXM), around 2.3% of its 13F portfolio. EJF Capital is also relatively very bullish on the stock, designating 0.05 percent of its 13F equity portfolio to CNXM.

Because CNX Midstream Partners LP (NYSE:CNXM) has witnessed declining sentiment from hedge fund managers, logic holds that there is a sect of fund managers who sold off their entire stakes in the third quarter. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP cut the biggest investment of the “upper crust” of funds tracked by Insider Monkey, worth close to $2.4 million in stock. Renaissance Technologies, also dumped its stock, about $0.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 1 funds in the third quarter.

Let’s check out hedge fund activity in other stocks similar to CNX Midstream Partners LP (NYSE:CNXM). These stocks are MSG Networks Inc (NYSE:MSGN), Nabors Industries Ltd. (NYSE:NBR), Bitauto Hldg Ltd (NYSE:BITA), and AK Steel Holding Corporation (NYSE:AKS). This group of stocks’ market values are similar to CNXM’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MSGN 28 304873 -6
NBR 21 148138 1
BITA 15 127794 1
AKS 11 36663 -3
Average 18.75 154367 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $154 million. That figure was $20 million in CNXM’s case. MSG Networks Inc (NYSE:MSGN) is the most popular stock in this table. On the other hand AK Steel Holding Corporation (NYSE:AKS) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks CNX Midstream Partners LP (NYSE:CNXM) is even less popular than AKS. Hedge funds dodged a bullet by taking a bearish stance towards CNXM. Our calculations showed that the top 10 most popular hedge fund stocks 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 managed to beat the market by 12.9 percentage points. Unfortunately CNXM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); CNXM investors were disappointed as the stock returned -55.1% 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 most of these stocks already outperformed the market so far 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.