Were Hedge Funds Right About Oil States International, Inc. (OIS)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Oil States International, Inc. (NYSE:OIS) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Oil States International, Inc. (NYSE:OIS) investors should be aware of a decrease in hedge fund sentiment of late. Our calculations also showed that OIS 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).

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

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 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 58 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.

Chuck Royce

Chuck Royce of Royce & Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a glance at the recent hedge fund action encompassing Oil States International, Inc. (NYSE:OIS).

What have hedge funds been doing with Oil States International, Inc. (NYSE:OIS)?

At Q1’s end, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in OIS over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Oil States International, Inc. (NYSE:OIS) was held by Arosa Capital Management, which reported holding $1.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $0.8 million position. Other investors bullish on the company included D E Shaw, Royce & Associates, and Millennium Management. In terms of the portfolio weights assigned to each position Arosa Capital Management allocated the biggest weight to Oil States International, Inc. (NYSE:OIS), around 0.14% of its 13F portfolio. Engineers Gate Manager is also relatively very bullish on the stock, designating 0.03 percent of its 13F equity portfolio to OIS.

Because Oil States International, Inc. (NYSE:OIS) has faced bearish sentiment from hedge fund managers, logic holds that there is a sect of hedgies who were dropping their positions entirely in the first quarter. Interestingly, Steve Cohen’s Point72 Asset Management said goodbye to the largest investment of the 750 funds watched by Insider Monkey, valued at about $0.5 million in stock, and Donald Sussman’s Paloma Partners was right behind this move, as the fund dumped about $0.4 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Oil States International, Inc. (NYSE:OIS) but similarly valued. We will take a look at Hebron Technology Co., Ltd. (NASDAQ:HEBT), Mistras Group, Inc. (NYSE:MG), American Superconductor Corporation (NASDAQ:AMSC), and Oak Valley Bancorp (NASDAQ:OVLY). This group of stocks’ market valuations are similar to OIS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HEBT 1 1124 0
MG 13 11507 -2
AMSC 10 18917 -1
OVLY 1 207 -1
Average 6.25 7939 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $5 million in OIS’s case. Mistras Group, Inc. (NYSE:MG) is the most popular stock in this table. On the other hand Hebron Technology Co., Ltd. (NASDAQ:HEBT) is the least popular one with only 1 bullish hedge fund positions. Oil States International, Inc. (NYSE:OIS) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on OIS as the stock returned 134% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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