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 (10 coronavirus predictions).
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 Gerdau SA (NYSE:GGB) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Gerdau SA (NYSE:GGB) shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. GGB was in 7 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 9 hedge funds in our database with GGB positions at the end of the previous quarter. Our calculations also showed that GGB 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).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Ken Fisher of Fisher Asset Management
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. Now let’s go over the latest hedge fund action regarding Gerdau SA (NYSE:GGB).
Hedge fund activity in Gerdau SA (NYSE:GGB)
Heading into the first quarter of 2020, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of -22% from the third quarter of 2019. On the other hand, there were a total of 12 hedge funds with a bullish position in GGB a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, Contrarian Capital was the largest shareholder of Gerdau SA (NYSE:GGB), with a stake worth $114.8 million reported as of the end of September. Trailing Contrarian Capital was Fisher Asset Management, which amassed a stake valued at $39.1 million. Indus Capital, Citadel Investment Group, and AQR Capital Management 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 Contrarian Capital allocated the biggest weight to Gerdau SA (NYSE:GGB), around 14.06% of its 13F portfolio. Indus Capital is also relatively very bullish on the stock, setting aside 1.02 percent of its 13F equity portfolio to GGB.
Since Gerdau SA (NYSE:GGB) has witnessed falling interest from the aggregate hedge fund industry, it’s safe to say that there exists a select few fund managers that decided to sell off their entire stakes heading into Q4. Interestingly, Matthew Hulsizer’s PEAK6 Capital Management said goodbye to the largest investment of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $1.5 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund sold off about $0.1 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds heading into Q4.
Let’s now take a look at hedge fund activity in other stocks similar to Gerdau SA (NYSE:GGB). These stocks are Credit Acceptance Corp. (NASDAQ:CACC), Lear Corporation (NYSE:LEA), Ares Management L.P. (NYSE:ARES), and Aspen Technology, Inc. (NASDAQ:AZPN). This group of stocks’ market valuations are similar to GGB’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CACC | 31 | 948045 | 6 |
| LEA | 29 | 1007450 | -10 |
| ARES | 18 | 235883 | 1 |
| AZPN | 37 | 1277921 | 6 |
| Average | 28.75 | 867325 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $867 million. That figure was $166 million in GGB’s case. Aspen Technology, Inc. (NASDAQ:AZPN) is the most popular stock in this table. On the other hand Ares Management L.P. (NYSE:ARES) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Gerdau SA (NYSE:GGB) is even less popular than ARES. Hedge funds dodged a bullet by taking a bearish stance towards GGB. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. Unfortunately GGB wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); GGB investors were disappointed as the stock returned -56% 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 most of these stocks already outperformed the market so far in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
