Should You Avoid Embraer SA (ADR) (ERJ)?

In the eyes of many investors, hedge funds are viewed as bloated, old investment vehicles of a forgotten age. Although there are In excess of 8,000 hedge funds in operation today, Insider Monkey looks at the aristocrats of this group, around 525 funds. It is assumed that this group controls the majority of all hedge funds’ total capital, and by paying attention to their best equity investments, we’ve brought to light a number of investment strategies that have historically outperformed the S&P 500. Our small-cap hedge fund strategy outperformed the S&P 500 index by 18 percentage points per annum for a decade in our back tests, and since we’ve began to sharing our picks with our subscribers at the end of August 2012, we have outclassed the S&P 500 index by 33 percentage points in 11 months (find a sample of our picks).

Just as useful, positive insider trading sentiment is a second way to look at the financial markets. Obviously, there are a variety of stimuli for an insider to sell shares of his or her company, but only one, very obvious reason why they would buy. Many academic studies have demonstrated the useful potential of this method if investors understand what to do (learn more here).

Thus, let’s examine the latest info about Embraer SA (ADR) (NYSE:ERJ).

How are hedge funds trading Embraer SA (ADR) (NYSE:ERJ)?

At Q2’s end, a total of 8 of the hedge funds we track were long in this stock, a change of -27% from the previous quarter. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their stakes significantly.

According to our 13F database, Fisher Asset Management, managed by Ken Fisher, holds the largest position in Embraer SA (ADR) (NYSE:ERJ). Fisher Asset Management has a $40.6 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is AQR Capital Management, managed by Cliff Asness, which held a $19.9 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other hedge funds with similar optimism include Michael Messner’s Seminole Capital (Investment Mgmt), Ken Griffin’s Citadel Investment Group and Phill Gross and Robert Atchinson’s Adage Capital Management.

Judging by the fact that Embraer SA (ADR) (NYSE:ERJ) has faced a fall in interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of hedge funds that decided to sell off their full holdings last quarter. At the top of the heap, Rob Citrone’s Discovery Capital Management dropped the biggest position of the “upper crust” of funds we monitor, valued at about $19.9 million in stock. Mike Vranos’s fund, Ellington, also dropped its stock, about $0.8 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 3 funds last quarter.

How are insiders trading Embraer SA (ADR) (NYSE:ERJ)?

Insider buying made by high-level executives is most useful when the company in focus has experienced transactions within the past six months. Over the latest 180-day time period, Embraer SA (ADR) (NYSE:ERJ) has experienced zero unique insiders buying, and zero insider sales (see the details of insider trades here).

We’ll go over the relationship between both of these indicators in other stocks similar to Embraer SA (ADR) (NYSE:ERJ). These stocks are Triumph Group Inc (NYSE:TGI), Rockwell Collins, Inc. (NYSE:COL), TransDigm Group Incorporated (NYSE:TDG), L-3 Communications Holdings, Inc. (NYSE:LLL), and B/E Aerospace Inc (NASDAQ:BEAV). All of these stocks are in the aerospace/defense products & services industry and their market caps match ERJ’s market cap.

Using the results demonstrated by our analyses, regular investors should always pay attention to hedge fund and insider trading activity, and Embraer SA (ADR) (NYSE:ERJ) is an important part of this process.

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