Should You Add Graco Inc. (GGG) to Your Portfolio?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The S&P 500 Index gained 7.6% in the 12 month-period that ended November 21, while less than 49% of its stocks beat the benchmark. In contrast, the 30 most popular mid-cap stocks among the top hedge fund investors tracked by the Insider Monkey team returned 18% over the same period, which provides evidence that these money managers do have great stock picking abilities. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Graco Inc. (NYSE:GGG).

Graco Inc. (NYSE:GGG) was included in the equity portfolios of 12 funds tracked by Insider Monkey at the end of the third quarter of 2016. GGG saw an increase in hedge fund sentiment lately, as there had been 11 funds with GGG holdings at the end of the previous quarter. At the end of this article we will also compare GGG to other stocks including Oshkosh Corporation (NYSE:OSK), Echostar Corporation (NASDAQ:SATS), and Penske Automotive Group, Inc. (NYSE:PAG) to get a better sense of its popularity.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

VladisChern/Shutterstock.com

With all of this in mind, we’re going to review the recent action surrounding Graco Inc. (NYSE:GGG).

What does the smart money think about Graco Inc. (NYSE:GGG)?

At Q3’s end, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, up by 9% from one quarter earlier. By comparison, 12 hedge funds held shares or bullish call options in GGG heading into this year. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, GAMCO Investors, led by Mario Gabelli, holds the largest position in Graco Inc. (NYSE:GGG). GAMCO Investors has a $99.6 million position in the stock, comprising 0.6% of its 13F portfolio. The second most bullish fund is Chuck Royce’s Royce & Associates, with a $22.2 million position; 0.1% of its 13F portfolio is allocated to the company. Some other peers that hold long positions contain Millennium Management, one of the 10 largest hedge funds in the world, and Greg Poole’s Echo Street Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Consequently, some big names were leading the bulls’ herd. Select Equity Group, led by Robert Joseph Caruso, established the most outsized position in Graco Inc. (NYSE:GGG). Select Equity Group had $14.2 million invested in the company at the end of the quarter. Millennium Management, one of the 10 largest hedge funds in the world also initiated a $3.9 million position during the quarter. The following funds were also among the new GGG investors: George Hall’s Clinton Group, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Ken Griffin’s Citadel Investment Group.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Graco Inc. (NYSE:GGG) but similarly valued. These stocks are Oshkosh Corporation (NYSE:OSK), Echostar Corporation (NASDAQ:SATS), Penske Automotive Group, Inc. (NYSE:PAG), and Hexcel Corporation (NYSE:HXL). This group of stocks’ market caps are closest to GGG’s market cap.

As you can see these stocks had an average of 20 funds with bullish positions and the average amount invested in these stocks was $214 million, versus $154 million in GGG’s case. Echostar Corporation (NASDAQ:SATS) is the most popular stock in this table. On the other hand Penske Automotive Group, Inc. (NYSE:PAG) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Graco Inc. (NYSE:GGG) registered the same number of funds with long positions as Penske Automotive Group. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: none