The scandal-plagued Brazilian mega company Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is down on the stock exchange today by 3.67% on falling crude oil prices. Petrobras which aside from its well-documented scandals, is also struggling with high debt ratios and falling oil prices, has recovered a bit during the past few months to post gains of 22.9% year-to-date, though it’s still a hefty 38.7% below its trading price of one year ago today. The corruption scandal involving Petrobras has been a major story in its homeland of Brazil for some time now, and that scandal recently heated up again when former president Lula Da Silva reportedly filed a habeas corpus petition to prevent his arrest. That led to a major dumping of Brazil’s stocks in general last week. Many institutional investors have been worried about the corruption accusations not only against Petrobras, but in Brazilian companies in general. The timing for Brazil could indeed have been better; the large protest against the World Cup last summer, the strikes and protests against the Olympic games next summer, and the heavy decline in the oil prices hasn’t exactly boosted the Brazilian economy and the oil heavy Bovespa. The corruption scandal now reveals the deep structural problems Brazil, and many other growing economies in South America like Colombia and Peru, are struggling with. We covered Petrobras last argued that it may be a good buy for an investor with a longer investment horizon, one who is also insensitive to daily volatility in stocks. Are we keeping that view given the latest developments to the stock? Let’s find out.
Amid the scandals and uncertainty, it’s not surprising that the smart money is taking a bearish view on Petrobas. The number of long hedge fund bets fell by three in recent months. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) was in 35 hedge funds’ portfolios at the end of March compared to 38 hedge funds with positions in the stock at the end of the previous quarter. In terms of aggregate investment value however, there was a big increase during the first quarter, to $737 million from $568 million, even as shares fell by quite a bit during the first quarter, so there was some noticeable bullishness in the stock among the best money managers. Nor have they been proven wrong despite the latest dips; shares are still up by nearly 50% in the second quarter.
We pay attention to hedge funds’ moves because our research have shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. however, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular stock picks in real time since the end of August 2012. These stocks returned 145% since then and outperformed the S&P 500 Index by 85 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Usually, inside transactions are another good indicator of the state of a stock. However, when consulting our database we find there has not been any reported insider activity in Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) this year. Let’s move on to hedge fund sentiment then and see what the smart money thinks about this stock.
What have hedge funds been doing with 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 decline of 8% from the fourth quarter. With hedgies’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings significantly.
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, corresponding to 0.4% of its total 13F portfolio. The second-largest stake is held by Senator Investment Group, led by Doug Silverman and Alexander Klabin, holding a $123.2 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Other peers that are bullish consist of Rob Citrone’s Discovery Capital Management, and Ken Fisher’s Fisher Asset Management.
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Because Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has experienced falling interest from the aggregate hedge fund industry, it’s easy to see that there is a sect of hedge funds who sold off their full holdings at the end of the first quarter. It’s worth mentioning that Jim Simons’ Renaissance Technologies said goodbye to the biggest stake of all the hedgies watched by Insider Monkey, comprising close to $72 million in stock. Randall Smith’s fund, Alden Global Capital, also dropped its stock, about $47.5 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by three funds at the end of the first quarter.
To conclude, Petrobras, even if struggling with debt, difficult oil prices, and corruption, might have been punished a bit too harshly on the exchange in recent days, and we hold to our position that Petrobras is a solid company to invest in for the investor with a longer horizon, who won’t panic at the first signs of negative volatility (like today).
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