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 BRF S.A. (NYSE:BRFS) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Hedge fund interest in BRF S.A. (NYSE:BRFS) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as CAE, Inc. (NYSE:CAE), Chemed Corporation (NYSE:CHE), and Perrigo Company (NASDAQ:PRGO) to gather more data points. Our calculations also showed that BRFS 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).
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 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 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.
Howard Marks of Oaktree Capital 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. With all of this in mind let’s review the fresh hedge fund action encompassing BRF S.A. (NYSE:BRFS).
What does smart money think about BRF S.A. (NYSE:BRFS)?
At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 9 hedge funds with a bullish position in BRFS a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
The largest stake in BRF S.A. (NYSE:BRFS) was held by Oaktree Capital Management, which reported holding $49.2 million worth of stock at the end of September. It was followed by Passport Capital with a $17.4 million position. Other investors bullish on the company included Platinum Asset Management, Millennium Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Passport Capital allocated the biggest weight to BRF S.A. (NYSE:BRFS), around 4.41% of its 13F portfolio. Oaktree Capital Management is also relatively very bullish on the stock, earmarking 0.93 percent of its 13F equity portfolio to BRFS.
Judging by the fact that BRF S.A. (NYSE:BRFS) has witnessed a decline in interest from the smart money, it’s easy to see that there were a few fund managers that decided to sell off their positions entirely heading into Q4. It’s worth mentioning that Daniel Gold’s QVT Financial cut the largest investment of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $6.4 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also dumped its stock, about $1.7 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now take a look at hedge fund activity in other stocks similar to BRF S.A. (NYSE:BRFS). We will take a look at CAE, Inc. (NYSE:CAE), Chemed Corporation (NYSE:CHE), Perrigo Company (NYSE:PRGO), and PRA Health Sciences Inc (NASDAQ:PRAH). This group of stocks’ market values are similar to BRFS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CAE | 10 | 138012 | -1 |
| CHE | 22 | 399646 | -1 |
| PRGO | 27 | 237292 | 11 |
| PRAH | 38 | 362811 | 3 |
| Average | 24.25 | 284440 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $284 million. That figure was $120 million in BRFS’s case. PRA Health Sciences Inc (NASDAQ:PRAH) is the most popular stock in this table. On the other hand CAE, Inc. (NYSE:CAE) is the least popular one with only 10 bullish hedge fund positions. BRF S.A. (NYSE:BRFS) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds 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 beat the market by 3.2 percentage points. Unfortunately BRFS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BRFS investors were disappointed as the stock returned -69.1% 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 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.
