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Were Hedge Funds Right About Flocking Into Enerplus Corp (ERF) ?

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Enerplus Corp (NYSE:ERF) to find out whether it was one of their high conviction long-term ideas.

Enerplus Corp (NYSE:ERF) has experienced an increase in hedge fund sentiment lately. ERF was in 18 hedge funds’ portfolios at the end of December. There were 17 hedge funds in our database with ERF holdings at the end of the previous quarter. Our calculations also showed that erf isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

Blair Levinsky of Waratah Capital Advisors

Let’s take a look at the fresh hedge fund action encompassing Enerplus Corp (NYSE:ERF).

How are hedge funds trading Enerplus Corp (NYSE:ERF)?

Heading into the first quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in ERF a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with ERF Positions

More specifically, Encompass Capital Advisors was the largest shareholder of Enerplus Corp (NYSE:ERF), with a stake worth $64.6 million reported as of the end of September. Trailing Encompass Capital Advisors was Cardinal Capital, which amassed a stake valued at $24.4 million. Two Sigma Advisors, Waratah Capital Advisors, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

Consequently, key hedge funds have been driving this bullishness. Renaissance Technologies, managed by Jim Simons, established the most outsized position in Enerplus Corp (NYSE:ERF). Renaissance Technologies had $4.5 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $2.3 million position during the quarter. The other funds with new positions in the stock are Ronald Hua’s Qtron Investments and David Costen Haley’s HBK Investments.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Enerplus Corp (NYSE:ERF) but similarly valued. These stocks are Fabrinet (NYSE:FN), Granite Construction Incorporated (NYSE:GVA), DiamondRock Hospitality Company (NYSE:DRH), and Taylor Morrison Home Corp (NYSE:TMHC). This group of stocks’ market caps are closest to ERF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FN 18 127429 3
GVA 11 94135 -5
DRH 19 167292 10
TMHC 15 219436 -6
Average 15.75 152073 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $152 million. That figure was $142 million in ERF’s case. DiamondRock Hospitality Company (NYSE:DRH) is the most popular stock in this table. On the other hand Granite Construction Incorporated (NYSE:GVA) is the least popular one with only 11 bullish hedge fund positions. Enerplus Corp (NYSE:ERF) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on ERF as the stock returned 24.4% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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