Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 13.1% in the 2.5 months of 2019 (including dividend payments). Conversely, hedge funds’ 15 preferred S&P 500 stocks generated a return of 19.7% during the same period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Graco Inc. (NYSE:GGG).
Graco Inc. (NYSE:GGG) investors should pay attention to a decrease in hedge fund interest recently, though overall hedge fund sentiment is still near its all time high that was achieved during the third quarter of 2018. Our calculations also showed that GGG isn’t among the 30 most popular stocks among hedge funds.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.
Let’s take a peek at the fresh hedge fund action surrounding Graco Inc. (NYSE:GGG).
What does the smart money think about Graco Inc. (NYSE:GGG)?
Heading into the first quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GGG over the last 14 quarters. 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, GAMCO Investors held the most valuable stake in Graco Inc. (NYSE:GGG), which was worth $102.3 million at the end of the third quarter. On the second spot was Royce & Associates which amassed $20.5 million worth of shares. Moreover, Millennium Management, Winton Capital Management, and Renaissance Technologies were also bullish on Graco Inc. (NYSE:GGG), allocating a large percentage of their portfolios to this stock.
Because Graco Inc. (NYSE:GGG) has faced declining sentiment from hedge fund managers, it’s easy to see that there was a specific group of money managers who sold off their entire stakes by the end of the third quarter. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP dropped the biggest investment of all the hedgies monitored by Insider Monkey, comprising an estimated $7.2 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund cut about $6.1 million worth. These transactions are interesting, as total hedge fund interest dropped by 4 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Graco Inc. (NYSE:GGG) but similarly valued. These stocks are Bio-Rad Laboratories, Inc. (NYSE:BIO), ON Semiconductor Corporation (NASDAQ:ON), Robert Half International Inc. (NYSE:RHI), and Enel Chile S.A. (NYSE:ENIC). This group of stocks’ market valuations resemble GGG’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BIO | 35 | 684500 | -3 |
| ON | 29 | 423253 | 2 |
| RHI | 26 | 554927 | -2 |
| ENIC | 7 | 27199 | 3 |
| Average | 24.25 | 422470 | 0 |
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 $422 million. That figure was $196 million in GGG’s case. Bio-Rad Laboratories, Inc. (NYSE:BIO) is the most popular stock in this table. On the other hand Enel Chile S.A. (NYSE:ENIC) is the least popular one with only 7 bullish hedge fund positions. Graco Inc. (NYSE:GGG) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Hedge funds were also right about betting on GGG as the stock returned 25.9% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
