Should I Buy Nuverra Environmental Solutions Inc (NES)?

Asma UL Husna

The 800+ hedge funds and famous money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the third quarter, which unveil their equity positions as of September 30. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund portfolios. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards Nuverra Environmental Solutions Inc (NYSE:NES).

Hedge fund interest in Nuverra Environmental Solutions Inc (NYSE:NES) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that NES isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Summer Infant, Inc. (NASDAQ:SUMR), BK Technologies Corporation (NYSE:BKTI), and AMCON Distributing Co. (NYSE:DIT) to gather more data points. 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 66 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.

Jeffrey Gates of Gates Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website.Keeping this in mind let's review the fresh hedge fund action encompassing Nuverra Environmental Solutions Inc (NYSE:NES).

What does smart money think about Nuverra Environmental Solutions Inc (NYSE:NES)?

Heading into the fourth quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NES over the last 21 quarters. With the smart money's sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Jeffrey Gates's Gates Capital Management has the largest position in Nuverra Environmental Solutions Inc (NYSE:NES), worth close to $16.4 million, accounting for 0.7% of its total 13F portfolio. The second most bullish fund manager is Israel Englander of Millennium Management, with a $0.2 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. In terms of the portfolio weights assigned to each position Gates Capital Management allocated the biggest weight to Nuverra Environmental Solutions Inc (NYSE:NES), around 0.71% of its 13F portfolio. Millennium Management is also relatively very bullish on the stock, dishing out 0.0003 percent of its 13F equity portfolio to NES.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Minerva Advisors. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Millennium Management).

Let's go over hedge fund activity in other stocks similar to Nuverra Environmental Solutions Inc (NYSE:NES). We will take a look at Summer Infant, Inc. (NASDAQ:SUMR), BK Technologies Corporation (NYSE:BKTI), AMCON Distributing Co. (NYSE:DIT), Great Elm Capital Corp. (NASDAQ:GECC), Beasley Broadcast Group Inc (NASDAQ:BBGI), Polar Power, Inc. (NASDAQ:POLA), and Navios Maritime Containers L.P. (NASDAQ:NMCI). This group of stocks' market values match NES's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SUMR,3,16013,0 BKTI,1,1959,0 DIT,1,705,0 GECC,5,654,1 BBGI,2,1495,0 POLA,2,1344,-1 NMCI,3,5793,0 Average,2.4,3995,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 2.4 hedge funds with bullish positions and the average amount invested in these stocks was $4 million. That figure was $17 million in NES's case. Great Elm Capital Corp. (NASDAQ:GECC) is the most popular stock in this table. On the other hand BK Technologies Corporation (NYSE:BKTI) is the least popular one with only 1 bullish hedge fund positions. Nuverra Environmental Solutions Inc (NYSE:NES) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NES is 48. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 percentage points. These stocks gained 28.1% in 2020 through November 23rd and beat the market again by 15.4 percentage points. Unfortunately NES wasn't nearly as popular as these 20 stocks and hedge funds that were betting on NES were disappointed as the stock returned -5.4% since the end of September (through 11/23) 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.

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

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