Did Hedge Funds Make The Right Call On The Gap Inc. (GPS) ?

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 The Gap Inc. (NYSE:GPS) and determine whether the smart money was really smart about this stock.

Is The Gap Inc. (NYSE:GPS) a healthy stock for your portfolio? The smart money was selling. The number of long hedge fund bets retreated by 7 lately. Our calculations also showed that GPS 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.

Joel Greenblatt of Gotham Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind let’s take a gander at the recent hedge fund action surrounding The Gap Inc. (NYSE:GPS).

What have hedge funds been doing with The Gap Inc. (NYSE:GPS)?

At the end of the first quarter, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from one quarter earlier. By comparison, 27 hedge funds held shares or bullish call options in GPS a year ago. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Cliff Asness’s AQR Capital Management has the biggest position in The Gap Inc. (NYSE:GPS), worth close to $10.7 million, accounting for less than 0.1%% of its total 13F portfolio. Coming in second is Citadel Investment Group, managed by Ken Griffin, which holds a $10.6 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining peers that hold long positions include Joel Greenblatt’s Gotham Asset Management, Brandon Haley’s Holocene Advisors and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position Invenomic Capital Management allocated the biggest weight to The Gap Inc. (NYSE:GPS), around 0.63% of its 13F portfolio. Cognios Capital is also relatively very bullish on the stock, setting aside 0.43 percent of its 13F equity portfolio to GPS.

Judging by the fact that The Gap Inc. (NYSE:GPS) has experienced a decline in interest from hedge fund managers, it’s easy to see that there is a sect of fund managers that elected to cut their positions entirely in the first quarter. At the top of the heap, Benjamin A. Smith’s Laurion Capital Management sold off the biggest investment of the “upper crust” of funds tracked by Insider Monkey, comprising close to $8.4 million in stock. Lee Ainslie’s fund, Maverick Capital, also dumped its stock, about $8.4 million worth. These moves are important to note, as total hedge fund interest dropped by 7 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as The Gap Inc. (NYSE:GPS) but similarly valued. We will take a look at Kirby Corporation (NYSE:KEX), The Brink’s Company (NYSE:BCO), OneMain Holdings Inc (NYSE:OMF), and Synovus Financial Corp. (NYSE:SNV). This group of stocks’ market valuations are closest to GPS’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $253 million. That figure was $49 million in GPS’s case. OneMain Holdings Inc (NYSE:OMF) is the most popular stock in this table. On the other hand Kirby Corporation (NYSE:KEX) is the least popular one with only 21 bullish hedge fund positions. The Gap Inc. (NYSE:GPS) is not the least popular stock in this group but hedge fund interest is still below average. 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on GPS as the stock returned 86.1% during the second quarter and outperformed the market by an even larger margin.

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