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Were Hedge Funds Right About Piling Into Natural Gas Services Group, Inc. (NGS)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Natural Gas Services Group, Inc. (NYSE:NGS) and determine whether the smart money was really smart about this stock.

Natural Gas Services Group, Inc. (NYSE:NGS) was in 10 hedge funds’ portfolios at the end of March. NGS investors should be aware of an increase in hedge fund interest lately. There were 9 hedge funds in our database with NGS positions at the end of the previous quarter. Our calculations also showed that NGS 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.

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 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. 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.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

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. Now let’s review the key hedge fund action regarding Natural Gas Services Group, Inc. (NYSE:NGS).

What have hedge funds been doing with Natural Gas Services Group, Inc. (NYSE:NGS)?

Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from one quarter earlier. On the other hand, there were a total of 7 hedge funds with a bullish position in NGS a year ago. 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 Natural Gas Services Group, Inc. (NYSE:NGS) was held by Renaissance Technologies, which reported holding $3.5 million worth of stock at the end of September. It was followed by Royce & Associates with a $1.3 million position. Other investors bullish on the company included AltraVue Capital, D E Shaw, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position AltraVue Capital allocated the biggest weight to Natural Gas Services Group, Inc. (NYSE:NGS), around 0.74% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, earmarking 0.02 percent of its 13F equity portfolio to NGS.

As aggregate interest increased, key hedge funds have been driving this bullishness. Engineers Gate Manager, managed by Greg Eisner, established the biggest position in Natural Gas Services Group, Inc. (NYSE:NGS). Engineers Gate Manager had $0.1 million invested in the company at the end of the quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Natural Gas Services Group, Inc. (NYSE:NGS) but similarly valued. These stocks are VBI Vaccines, Inc. (NASDAQ:VBIV), Cortland Bancorp (NASDAQ:CLDB), MSB Financial Corp. (NASDAQ:MSBF), and China Jo Jo Drugstores Inc (NASDAQ:CJJD). All of these stocks’ market caps are closest to NGS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VBIV 4 44079 -3
CLDB 3 5586 0
MSBF 6 13953 -1
CJJD 3 10594 -2
Average 4 18553 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $19 million. That figure was $7 million in NGS’s case. MSB Financial Corp. (NASDAQ:MSBF) is the most popular stock in this table. On the other hand Cortland Bancorp (NASDAQ:CLDB) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Natural Gas Services Group, Inc. (NYSE:NGS) 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on NGS as the stock returned 40.6% in Q2 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.