Did Hedge Funds Make The Right Call On Vale SA (VALE) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Vale SA (NYSE:VALE) based on that data and determine whether they were really smart about the stock.

Vale SA (NYSE:VALE) shareholders have witnessed an increase in hedge fund interest lately. VALE was in 28 hedge funds’ portfolios at the end of March. There were 26 hedge funds in our database with VALE positions at the end of the previous quarter. Our calculations also showed that VALE 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.

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 S&P 500 ETFs by more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Richard Driehaus of Driehaus Capital

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. Now we’re going to view the new hedge fund action regarding Vale SA (NYSE:VALE).

Hedge fund activity in Vale SA (NYSE:VALE)

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in VALE a year ago. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, William B. Gray’s Orbis Investment Management has the most valuable position in Vale SA (NYSE:VALE), worth close to $279.2 million, accounting for 2.7% of its total 13F portfolio. The second largest stake is held by Ken Fisher of Fisher Asset Management, with a $226.2 million position; 0.3% of its 13F portfolio is allocated to the company. Some other peers with similar optimism include Renaissance Technologies, Ken Griffin’s Citadel Investment Group and Jon Bauer’s Contrarian Capital. In terms of the portfolio weights assigned to each position Contrarian Capital allocated the biggest weight to Vale SA (NYSE:VALE), around 34.06% of its 13F portfolio. JHL Capital Group is also relatively very bullish on the stock, designating 31.88 percent of its 13F equity portfolio to VALE.

Now, key money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the largest position in Vale SA (NYSE:VALE). Arrowstreet Capital had $44.3 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also initiated a $25.9 million position during the quarter. The other funds with new positions in the stock are Martin Taylor’s Crake Asset Management, David Kowitz and Sheldon Kasowitz’s Indus Capital, and David Halpert’s Prince Street Capital Management.

Let’s now review hedge fund activity in other stocks similar to Vale SA (NYSE:VALE). These stocks are The Sherwin-Williams Company (NYSE:SHW), Applied Materials, Inc. (NASDAQ:AMAT), Pinduoduo Inc. (NASDAQ:PDD), and TC Energy Corporation (NYSE:TRP). This group of stocks’ market caps match VALE’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.25 hedge funds with bullish positions and the average amount invested in these stocks was $1421 million. That figure was $1112 million in VALE’s case. The Sherwin-Williams Company (NYSE:SHW) is the most popular stock in this table. On the other hand TC Energy Corporation (NYSE:TRP) is the least popular one with only 24 bullish hedge fund positions. Vale SA (NYSE:VALE) 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 but beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on VALE, though not to the same extent, as the stock returned 24.4% during the second quarter and outperformed the market.

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