The shares of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) plunged 4.49% yesterday after a local newspaper in Brazil reported the involvement of former Brazilian President Luiz Inacio Lula da Silva in the longstanding corruption scandal that has plagued the integrated energy company. The news report caused a panic among investors, who started dumping Brazilian assets as soon as the report came out. According to the report, filed by Folha de S. Paulo newspaper, Lula filed a “preventative habeas corpus petition” to avoid arrest in the corruption case, although the newspaper later updated the report to say that the petition was filed on behalf of Lula. Lula’s office negated any such filing on behalf of the former President and prosecutors denied any investigations involving Lula. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) was accused of colluding with construction companies and inflating the price of contracts last year. As per the federal investigations carried out in Brazil, the bribe amount was as high as $2.07 billion and it involved several high-profile executives of the company and local politicians with investigations ongoing. What is rather interesting is the impact of this news on the Brazilian market, as it fully encapsulates the fear of investors concerning the political environment of the country. According to Camila Abdelmalack, economist at CM Capital Markets, “Phones rang, e-mails came in, sell orders piled up.”
Interestingly, the smart money has been bullish lately, likely feeling the scandal has already done all the damage to the stock that it will, with shares down by 42.7% during the past year. The number of long hedge fund bets was trimmed by three in recent months among the funds we track. Petroleo was in 35 hedge funds’ portfolios at the end of March, with net investments worth $737.10 million. There were 38 hedge funds in our database with PBR positions at the end of the previous quarter, holding $568.30 million in shares. As you can see, the aggregate investment amount skyrocketed by about 30% during the first quarter, despite shares declining by nearly 18% during that time. The data shows that several leading money managers were making some very bullish bets on Petroleo, and they ended up being correct: even with the latest drop, shares are still up by 50% in the second quarter.
At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of six basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning over 142% and beating the market by more than 84 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise rather than large-cap stocks.
As an investor, it could be difficult to predict such events and their impact on the shares of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) and other stocks. One of the best ways to discover profit-making opportunities in addition to hedge fund sentiment is to follow the insider activity for a given stock. Insiders are aware of the latest developments inside the company and they are the first ones to make moves on them. Research shows a clear link between insider purchases and stronger stock performance. However, there is no recorded insider activity at Petroleo over the past six months.
With all of this in mind, we’re going to take a look at the recent hedge fund action encompassing Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR).
Hedge fund activity in Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)
Heading into the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey were bullish in this stock, a drop of 8% from one quarter earlier. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their stakes considerably.
According to hedge fund experts at Insider Monkey, Daniel S. Och’s OZ Management had the biggest position in Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), worth close to $135.9 million, amounting to 0.4% of its total 13F portfolio. On OZ Management’s heels is Senator Investment Group, managed by Doug Silverman and Alexander Klabin, which held a $123.2 million position; 1.2% of its 13F portfolio is allocated to the company. Other hedgies that hold long positions include Rob Citrone’s Discovery Capital Management, and Ken Fisher’s Fisher Asset Management.
With the latest news scaring up the markets and sending prices drooping, it could be a good time to take advantage and get in on Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) at a reduced rate. We recommend a buy on this stock for patient investors who won’t overreact to the latest market news like some of its former investors did yesterday.
Disclosure: None
