Hedge Funds Are Selling Ferrari N.V. (RACE)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Ferrari N.V. (NYSE:RACE) and determine whether hedge funds had an edge regarding this stock.

Ferrari N.V. (NYSE:RACE) was in 25 hedge funds’ portfolios at the end of June. The all time high for this statistics is 36. RACE has seen a decrease in support from the world’s most elite money managers recently. There were 29 hedge funds in our database with RACE holdings at the end of March. Our calculations also showed that RACE isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

Dan Loeb of Third Point

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 to get excerpts of these letters in your inbox. Keeping this in mind let’s take a peek at the recent hedge fund action encompassing Ferrari N.V. (NYSE:RACE).

Hedge fund activity in Ferrari N.V. (NYSE:RACE)

At Q2’s end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in RACE over the last 20 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Ako Capital held the most valuable stake in Ferrari N.V. (NYSE:RACE), which was worth $323 million at the end of the third quarter. On the second spot was D1 Capital Partners which amassed $197.1 million worth of shares. Third Point, Darsana Capital Partners, and Melvin 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 Alatus Capital allocated the biggest weight to Ferrari N.V. (NYSE:RACE), around 100% of its 13F portfolio. Lansing Management is also relatively very bullish on the stock, setting aside 16.43 percent of its 13F equity portfolio to RACE.

Since Ferrari N.V. (NYSE:RACE) has witnessed bearish sentiment from the smart money, it’s easy to see that there lies a certain “tier” of fund managers that elected to cut their full holdings last quarter. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management dropped the largest position of the 750 funds watched by Insider Monkey, totaling close to $5.5 million in stock, and Tom Sandell’s Sandell Asset Management was right behind this move, as the fund cut about $2.3 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 4 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ferrari N.V. (NYSE:RACE) but similarly valued. These stocks are Koninklijke Philips NV (NYSE:PHG), Ambev SA (NYSE:ABEV), UBS Group AG (NYSE:UBS), Baidu, Inc. (NASDAQ:BIDU), Infosys Limited (NYSE:INFY), Dell Technologies Inc. (NYSE:DELL), and Lululemon Athletica inc. (NASDAQ:LULU). This group of stocks’ market values match RACE’s market value.

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 $1184 million. That figure was $1362 million in RACE’s case. Dell Technologies Inc. (NYSE:DELL) is the most popular stock in this table. On the other hand Koninklijke Philips NV (NYSE:PHG) is the least popular one with only 6 bullish hedge fund positions. Ferrari N.V. (NYSE:RACE) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for RACE is 43.4. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately RACE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); RACE investors were disappointed as the stock returned 6% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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