The fourth quarter was a rough one for most investors, as fears of a rising interest rate environment in the U.S, a trade war with China, and a more or less stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards Braskem SA (NYSE:BAK), and what that likely means for the prospects of the company and its stock.
Is Braskem SA (NYSE:BAK) a healthy stock for your portfolio? The best stock pickers are in a bearish mood. The number of bullish hedge fund positions dropped by 4 lately. Our calculations also showed that BAK isn’t among the 30 most popular stocks among hedge funds. BAK was in 13 hedge funds’ portfolios at the end of September. There were 17 hedge funds in our database with BAK positions at the end of the previous quarter.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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.
We’re going to go over the latest hedge fund action regarding Braskem SA (NYSE:BAK).
Hedge fund activity in Braskem SA (NYSE:BAK)
At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -24% from one quarter earlier. By comparison, 15 hedge funds held shares or bullish call options in BAK heading into this year. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in Braskem SA (NYSE:BAK), which was worth $123.9 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $116.5 million worth of shares. Moreover, Contrarian Capital, Carlson Capital, and Arrowstreet Capital were also bullish on Braskem SA (NYSE:BAK), allocating a large percentage of their portfolios to this stock.
Since Braskem SA (NYSE:BAK) has experienced falling interest from the smart money, we can see that there were a few hedge funds that elected to cut their positions entirely by the end of the third quarter. Intriguingly, Glenn Russell Dubin’s Highbridge Capital Management dropped the biggest position of the 700 funds monitored by Insider Monkey, worth an estimated $6.3 million in stock. Steve Cohen’s fund, Point72 Asset Management, also cut its stock, about $3.9 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 4 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks similar to Braskem SA (NYSE:BAK). We will take a look at Martin Marietta Materials, Inc. (NYSE:MLM), Mid America Apartment Communities Inc (NYSE:MAA), Live Nation Entertainment, Inc. (NYSE:LYV), and NRG Energy Inc (NYSE:NRG). This group of stocks’ market valuations are similar to BAK’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MLM | 33 | 1484382 | 0 |
| MAA | 15 | 316981 | 1 |
| LYV | 38 | 966519 | 6 |
| NRG | 50 | 2189506 | 1 |
| Average | 34 | 1239347 | 2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $1.24 billion. That figure was $401 million in BAK’s case. NRG Energy Inc (NYSE:NRG) is the most popular stock in this table. On the other hand Mid America Apartment Communities Inc (NYSE:MAA) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Braskem SA (NYSE:BAK) is even less popular than MAA. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.
Disclosure: None. This article was originally published at Insider Monkey.
