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 (see why hell is coming).
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 Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA).
Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) was in 3 hedge funds’ portfolios at the end of December. IBA investors should be aware of a decrease in enthusiasm from smart money in recent months. There were 4 hedge funds in our database with IBA holdings at the end of the previous quarter. Our calculations also showed that IBA 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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 check out the recent hedge fund action encompassing Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA).
How are hedge funds trading Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA)?
Heading into the first quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the third quarter of 2019. By comparison, 3 hedge funds held shares or bullish call options in IBA a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA), which was worth $33.2 million at the end of the third quarter. On the second spot was Royce & Associates which amassed $6.3 million worth of shares. Sprott Asset Management was 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 Sprott Asset Management allocated the biggest weight to Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA), around 0.76% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, earmarking 0.06 percent of its 13F equity portfolio to IBA.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified IBA as a viable investment and initiated a position in the stock.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) but similarly valued. We will take a look at Monro, Inc. (NASDAQ:MNRO), Halozyme Therapeutics, Inc. (NASDAQ:HALO), Altair Engineering Inc. (NASDAQ:ALTR), and Applied Industrial Technologies, Inc. (NYSE:AIT). This group of stocks’ market values resemble IBA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MNRO | 18 | 171810 | 1 |
| HALO | 25 | 198183 | -1 |
| ALTR | 10 | 212059 | -2 |
| AIT | 22 | 115713 | 0 |
| Average | 18.75 | 174441 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $174 million. That figure was $43 million in IBA’s case. Halozyme Therapeutics, Inc. (NASDAQ:HALO) is the most popular stock in this table. On the other hand Altair Engineering Inc. (NASDAQ:ALTR) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) is even less popular than ALTR. Hedge funds dodged a bullet by taking a bearish stance towards IBA. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but managed to beat the market by 4.2 percentage points. Unfortunately IBA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); IBA investors were disappointed as the stock returned -42.5% 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 so far in 2020.
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.
