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 (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding The Gap Inc. (NYSE:GPS).
Is The Gap Inc. (NYSE:GPS) a buy here? The best stock pickers are in an optimistic mood. The number of bullish hedge fund positions rose by 4 in recent months. Our calculations also showed that GPS 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).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Lee Ainslie of Maverick Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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 we’re going to view the new hedge fund action encompassing The Gap Inc. (NYSE:GPS).
What does smart money think about The Gap Inc. (NYSE:GPS)?
At Q4’s end, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 15% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in GPS over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Cliff Asness’s AQR Capital Management has the largest position in The Gap Inc. (NYSE:GPS), worth close to $51.1 million, amounting to 0.1% of its total 13F portfolio. The second most bullish fund manager is Renaissance Technologies, holding a $18.6 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors with similar optimism comprise Ken Griffin’s Citadel Investment Group, Benjamin A. Smith’s Laurion Capital Management and Lee Ainslie’s Maverick Capital. In terms of the portfolio weights assigned to each position Invenomic Capital Management allocated the biggest weight to The Gap Inc. (NYSE:GPS), around 1.09% of its 13F portfolio. Cognios Capital is also relatively very bullish on the stock, setting aside 0.87 percent of its 13F equity portfolio to GPS.
As aggregate interest increased, specific money managers have been driving this bullishness. Maverick Capital, managed by Lee Ainslie, established the most outsized position in The Gap Inc. (NYSE:GPS). Maverick Capital had $8.4 million invested in the company at the end of the quarter. Ali Motamed’s Invenomic Capital Management also initiated a $2.7 million position during the quarter. The following funds were also among the new GPS investors: Donald Sussman’s Paloma Partners, Philippe Laffont’s Coatue Management, and Jinghua Yan’s TwinBeech Capital.
Let’s now take a look at hedge fund activity in other stocks similar to The Gap Inc. (NYSE:GPS). These stocks are Pearson PLC (NYSE:PSO), Ciena Corporation (NASDAQ:CIEN), ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD), and SYNNEX Corporation (NYSE:SNX). This group of stocks’ market valuations match GPS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PSO | 5 | 4209 | 2 |
| CIEN | 35 | 521742 | 4 |
| ACAD | 34 | 2320902 | 7 |
| SNX | 22 | 389913 | -2 |
| Average | 24 | 809192 | 2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $809 million. That figure was $128 million in GPS’s case. Ciena Corporation (NASDAQ:CIEN) is the most popular stock in this table. On the other hand Pearson PLC (NYSE:PSO) is the least popular one with only 5 bullish hedge fund positions. The Gap Inc. (NYSE:GPS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately GPS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on GPS were disappointed as the stock returned -52.2% 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 many of these stocks already outperformed the market so far this year.
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.
