Were Hedge Funds Right About PPG Industries, Inc. (PPG)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in PPG Industries, Inc. (NYSE:PPG)? The smart money sentiment can provide an answer to this question.

Is PPG Industries, Inc. (NYSE:PPG) the right pick for your portfolio? Prominent investors were turning bullish. The number of long hedge fund bets improved by 1 recently. PPG Industries, Inc. (NYSE:PPG) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 51. Our calculations also showed that PPG isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 56 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

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a glance at the fresh hedge fund action regarding PPG Industries, Inc. (NYSE:PPG).

What have hedge funds been doing with PPG Industries, Inc. (NYSE:PPG)?

At second quarter’s end, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the first quarter of 2020. By comparison, 27 hedge funds held shares or bullish call options in PPG a year ago. So, let’s examine 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, AQR Capital Management, managed by Cliff Asness, holds the number one position in PPG Industries, Inc. (NYSE:PPG). AQR Capital Management has a $44 million position in the stock, comprising 0.1% of its 13F portfolio. Coming in second is Echo Street Capital Management, managed by Greg Poole, which holds a $34.3 million position; 0.4% of its 13F portfolio is allocated to the company. Some other peers that are bullish contain Ken Griffin’s Citadel Investment Group, Phill Gross and Robert Atchinson’s Adage Capital Management and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Appian Way Asset Management allocated the biggest weight to PPG Industries, Inc. (NYSE:PPG), around 6.69% of its 13F portfolio. Appian Way Asset Management is also relatively very bullish on the stock, designating 3.35 percent of its 13F equity portfolio to PPG.

Now, key hedge funds have jumped into PPG Industries, Inc. (NYSE:PPG) headfirst. Appian Way Asset Management, managed by Andrew Byington, established the most valuable position in PPG Industries, Inc. (NYSE:PPG). Appian Way Asset Management had $11.6 million invested in the company at the end of the quarter. John D. Gillespie’s Prospector Partners also made a $6.7 million investment in the stock during the quarter. The other funds with brand new PPG positions are Andrew Byington’s Appian Way Asset Management, Louis Bacon’s Moore Global Investments, and Lee Ainslie’s Maverick Capital.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as PPG Industries, Inc. (NYSE:PPG) but similarly valued. These stocks are ANSYS, Inc. (NASDAQ:ANSS), Okta, Inc. (NASDAQ:OKTA), HP Inc. (NYSE:HPQ), McKesson Corporation (NYSE:MCK), Public Service Enterprise Group Incorporated (NYSE:PEG), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), and Credit Suisse Group AG (NYSE:CS). This group of stocks’ market caps resemble PPG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.6 hedge funds with bullish positions and the average amount invested in these stocks was $1534 million. That figure was $261 million in PPG’s case. McKesson Corporation (NYSE:MCK) is the most popular stock in this table. On the other hand Credit Suisse Group AG (NYSE:CS) is the least popular one with only 14 bullish hedge fund positions. PPG Industries, Inc. (NYSE:PPG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PPG is 50.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. A small number of hedge funds were also right about betting on PPG as the stock returned 22.9% since the end of the second quarter (through 10/30) and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.