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Were Hedge Funds Right About Kosmos Energy Ltd (KOS)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Kosmos Energy Ltd (NYSE:KOS) based on that data and determine whether they were really smart about the stock.

Is Kosmos Energy Ltd (NYSE:KOS) a buy here? The smart money was in a bearish mood. The number of long hedge fund positions fell by 9 lately. Our calculations also showed that KOS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). KOS was in 21 hedge funds’ portfolios at the end of March. There were 30 hedge funds in our database with KOS holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to analyze the latest hedge fund action regarding Kosmos Energy Ltd (NYSE:KOS).

Hedge fund activity in Kosmos Energy Ltd (NYSE:KOS)

Heading into the second quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -30% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KOS over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Is KOS A Good Stock To Buy?

Among these funds, AQR Capital Management held the most valuable stake in Kosmos Energy Ltd (NYSE:KOS), which was worth $11.4 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $4.4 million worth of shares. Winton Capital Management, Citadel Investment Group, and Millennium Management 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 Elm Ridge Capital allocated the biggest weight to Kosmos Energy Ltd (NYSE:KOS), around 1.8% of its 13F portfolio. Arosa Capital Management is also relatively very bullish on the stock, earmarking 0.14 percent of its 13F equity portfolio to KOS.

Since Kosmos Energy Ltd (NYSE:KOS) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there were a few fund managers that decided to sell off their entire stakes in the first quarter. Interestingly, Matt Smith’s Deep Basin Capital sold off the largest investment of all the hedgies followed by Insider Monkey, valued at about $16.3 million in stock, and Peter Muller’s PDT Partners was right behind this move, as the fund dumped about $4 million worth. These transactions are interesting, as total hedge fund interest fell by 9 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Kosmos Energy Ltd (NYSE:KOS) but similarly valued. We will take a look at Scholar Rock Holding Corporation (NASDAQ:SRRK), Replimune Group, Inc. (NASDAQ:REPL), Clearwater Paper Corp (NYSE:CLW), and American Public Education, Inc. (NASDAQ:APEI). This group of stocks’ market values match KOS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SRRK 5 40575 -2
REPL 8 58138 -1
CLW 5 22727 -1
APEI 13 61095 -1
Average 7.75 45634 -1.25

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 $46 million. That figure was $28 million in KOS’s case. American Public Education, Inc. (NASDAQ:APEI) is the most popular stock in this table. On the other hand Scholar Rock Holding Corporation (NASDAQ:SRRK) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Kosmos Energy Ltd (NYSE:KOS) 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 returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on KOS as the stock returned 86.7% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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