Hedge Funds Were Getting Burned By Genuine Parts Company (GPC) Before The Coronavirus

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Genuine Parts Company (NYSE:GPC).

Genuine Parts Company (NYSE:GPC) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds’ portfolios at the end of the fourth quarter of 2019. 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 iQIYI, Inc. (NASDAQ:IQ), Liberty Media Corporation (NASDAQ:LSXMA), and Live Nation Entertainment, Inc. (NYSE:LYV) to gather more data points. Our calculations also showed that GPC isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).

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 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. 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.

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. Keeping this in mind let’s view the new hedge fund action regarding Genuine Parts Company (NYSE:GPC).

What have hedge funds been doing with Genuine Parts Company (NYSE:GPC)?

At Q4’s end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GPC over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

More specifically, GAMCO Investors was the largest shareholder of Genuine Parts Company (NYSE:GPC), with a stake worth $121.8 million reported as of the end of September. Trailing GAMCO Investors was Holocene Advisors, which amassed a stake valued at $55.5 million. GLG Partners, Adage Capital Management, and Citadel Investment Group 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 GAMCO Investors allocated the biggest weight to Genuine Parts Company (NYSE:GPC), around 0.97% of its 13F portfolio. Holocene Advisors is also relatively very bullish on the stock, dishing out 0.5 percent of its 13F equity portfolio to GPC.

Due to the fact that Genuine Parts Company (NYSE:GPC) has experienced a decline in interest from the smart money, it’s safe to say that there lies a certain “tier” of money managers that decided to sell off their entire stakes by the end of the third quarter. Interestingly, Israel Englander’s Millennium Management said goodbye to the biggest position of all the hedgies followed by Insider Monkey, comprising about $3.8 million in stock. Donald Sussman’s fund, Paloma Partners, also dumped its stock, about $2.7 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Genuine Parts Company (NYSE:GPC). These stocks are iQIYI, Inc. (NASDAQ:IQ), Liberty Media Corporation (NASDAQ:LSXMA), Live Nation Entertainment, Inc. (NYSE:LYV), and Principal Financial Group Inc (NYSE:PFG). All of these stocks’ market caps are similar to GPC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1169 million. That figure was $271 million in GPC’s case. Liberty Media Corporation (NASDAQ:LSXMA) is the most popular stock in this table. On the other hand iQIYI, Inc. (NASDAQ:IQ) is the least popular one with only 18 bullish hedge fund positions. Genuine Parts Company (NYSE:GPC) 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 GPC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); GPC investors were disappointed as the stock returned -32.6% 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.