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Were Hedge Funds Right About Warming Up To REX American Resources?

How do we determine whether REX American Resources Corp (NYSE:REX) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

REX American Resources Corp (NYSE:REX) investors should be aware of an increase in support from the world’s most elite money managers in recent months. Our calculations also showed that REX isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 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.

REX_oct2019

Unlike other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. We’re going to take a look at the new hedge fund action regarding REX American Resources Corp (NYSE:REX).

Hedge fund activity in REX American Resources Corp (NYSE:REX)

At Q2’s end, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from the previous quarter. The graph below displays the number of hedge funds with bullish position in REX over the last 16 quarters. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

John Overdeck of Two Sigma

The largest stake in REX American Resources Corp (NYSE:REX) was held by Renaissance Technologies, which reported holding $37.1 million worth of stock at the end of March. It was followed by Millennium Management with a $0.7 million position. Other investors bullish on the company included AQR Capital Management, Royce & Associates, and Two Sigma Advisors.

Now, key hedge funds were breaking ground themselves. Millennium Management, managed by Israel Englander, established the biggest position in REX American Resources Corp (NYSE:REX). Millennium Management had $0.7 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also initiated a $0.3 million position during the quarter. The only other fund with a brand new REX position is David Harding’s Winton Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as REX American Resources Corp (NYSE:REX) but similarly valued. We will take a look at Synthorx, Inc. (NASDAQ:THOR), Replimune Group, Inc. (NASDAQ:REPL), Sentinel Energy Services Inc. (NASDAQ:STNL), and Flexion Therapeutics Inc (NASDAQ:FLXN). All of these stocks’ market caps are similar to REX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
THOR 7 232971 2
REPL 6 74225 1
STNL 15 137785 0
FLXN 15 112021 0
Average 10.75 139251 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $139 million. That figure was $40 million in REX’s case. Sentinel Energy Services Inc. (NASDAQ:STNL) is the most popular stock in this table. On the other hand Replimune Group, Inc. (NASDAQ:REPL) is the least popular one with only 6 bullish hedge fund positions. REX American Resources Corp (NYSE:REX) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on REX, though not to the same extent, as the stock returned 4.7% during the third quarter and outperformed the market.

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

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