Cimarex Energy Co (XEC): These Hedge Funds Were Caught Flat-Footed

Asma UL Husna

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let's take a look at whether Cimarex Energy Co (NYSE:XEC) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Cimarex Energy Co (NYSE:XEC) investors should pay attention to an increase in enthusiasm from smart money of late. XEC was in 33 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 32 hedge funds in our database with XEC positions at the end of the previous quarter. Our calculations also showed that XEC isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

[caption id="attachment_673972" align="aligncenter" width="399"] Blair Levinsky of Waratah Capital Advisors[/caption]

Blair Levinsky of Waratah Capital Advisors

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind we're going to take a peek at the fresh hedge fund action regarding Cimarex Energy Co (NYSE:XEC).

How have hedgies been trading Cimarex Energy Co (NYSE:XEC)?

Heading into the first quarter of 2020, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards XEC 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.

Among these funds, Diamond Hill Capital held the most valuable stake in Cimarex Energy Co (NYSE:XEC), which was worth $272.8 million at the end of the third quarter. On the second spot was International Value Advisers which amassed $124 million worth of shares. Adage Capital Management, Citadel Investment Group, and Encompass Capital Advisors 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 Encompass Capital Advisors allocated the biggest weight to Cimarex Energy Co (NYSE:XEC), around 5.33% of its 13F portfolio. International Value Advisers is also relatively very bullish on the stock, earmarking 5.08 percent of its 13F equity portfolio to XEC.

As industrywide interest jumped, specific money managers have jumped into Cimarex Energy Co (NYSE:XEC) headfirst. Millennium Management, managed by Israel Englander, initiated the most outsized position in Cimarex Energy Co (NYSE:XEC). Millennium Management had $66.5 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also initiated a $43.2 million position during the quarter. The other funds with new positions in the stock are Sara Nainzadeh's Centenus Global Management, Brad Dunkley and Blair Levinsky's Waratah Capital Advisors, and Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners.

Let's go over hedge fund activity in other stocks similar to Cimarex Energy Co (NYSE:XEC). We will take a look at The New York Times Company (NYSE:NYT), Air Lease Corp (NYSE:AL), Eaton Vance Corp (NYSE:EV), and JetBlue Airways Corporation (NASDAQ:JBLU). This group of stocks' market values resemble XEC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NYT,35,1407752,-3 AL,23,465385,-1 EV,24,57872,7 JBLU,35,668369,9 Average,29.25,649845,3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $650 million. That figure was $976 million in XEC's case. The New York Times Company (NYSE:NYT) is the most popular stock in this table. On the other hand Air Lease Corp (NYSE:AL) is the least popular one with only 23 bullish hedge fund positions. Cimarex Energy Co (NYSE:XEC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately XEC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on XEC were disappointed as the stock returned -67.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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