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Were Hedge Funds Right About Souring On U.S. Silica Holdings Inc (SLCA)?

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 U.S. Silica Holdings Inc (NYSE:SLCA) at the end of the first quarter and determine whether the smart money was really smart about this stock.

U.S. Silica Holdings Inc (NYSE:SLCA) was in 12 hedge funds’ portfolios at the end of the first quarter of 2020. SLCA investors should be aware of a decrease in hedge fund interest in recent months. There were 16 hedge funds in our database with SLCA holdings at the end of the previous quarter. Our calculations also showed that SLCA 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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 let’s view the key hedge fund action encompassing U.S. Silica Holdings Inc (NYSE:SLCA).

What have hedge funds been doing with U.S. Silica Holdings Inc (NYSE:SLCA)?

At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in SLCA a year ago. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

More specifically, Ariel Investments was the largest shareholder of U.S. Silica Holdings Inc (NYSE:SLCA), with a stake worth $20.1 million reported as of the end of September. Trailing Ariel Investments was Renaissance Technologies, which amassed a stake valued at $6 million. Prescott Group Capital Management, Royce & Associates, and D E Shaw 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 Prescott Group Capital Management allocated the biggest weight to U.S. Silica Holdings Inc (NYSE:SLCA), around 1.81% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, setting aside 0.35 percent of its 13F equity portfolio to SLCA.

Due to the fact that U.S. Silica Holdings Inc (NYSE:SLCA) has experienced falling interest from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of funds that slashed their entire stakes in the first quarter. Interestingly, Richard Mashaal’s Rima Senvest Management dropped the biggest position of the “upper crust” of funds watched by Insider Monkey, totaling an estimated $28.1 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also dumped its stock, about $2.7 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 4 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to U.S. Silica Holdings Inc (NYSE:SLCA). These stocks are OptimizeRx Corporation (NASDAQ:OPRX), Capital Product Partners L.P. (NASDAQ:CPLP), Paratek Pharmaceuticals Inc (NASDAQ:PRTK), and Prudential Bancorp, Inc. (NASDAQ:PBIP). All of these stocks’ market caps are closest to SLCA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OPRX 4 16355 -2
CPLP 4 2212 1
PRTK 11 10949 -2
PBIP 4 25625 0
Average 5.75 13785 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.75 hedge funds with bullish positions and the average amount invested in these stocks was $14 million. That figure was $33 million in SLCA’s case. Paratek Pharmaceuticals Inc (NASDAQ:PRTK) is the most popular stock in this table. On the other hand OptimizeRx Corporation (NASDAQ:OPRX) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks U.S. Silica Holdings Inc (NYSE:SLCA) 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 SLCA as the stock returned 100.6% 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.