We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Azul S.A. (NYSE:AZUL).
Is Azul S.A. (NYSE:AZUL) a bargain? Prominent investors are reducing their bets on the stock. The number of long hedge fund positions retreated by 1 in recent months. Our calculations also showed that AZUL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). AZUL was in 12 hedge funds' portfolios at the end of the third quarter of 2019. There were 13 hedge funds in our database with AZUL positions at the end of the previous quarter. Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_30614" align="aligncenter" width="489"] Howard Marks of Oaktree Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the new hedge fund action encompassing Azul S.A. (NYSE:AZUL).
How have hedgies been trading Azul S.A. (NYSE:AZUL)?
At Q3's end, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AZUL over the last 17 quarters. With hedgies' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Joe DiMenna's ZWEIG DIMENNA PARTNERS has the number one position in Azul S.A. (NYSE:AZUL), worth close to $38.8 million, corresponding to 3.4% of its total 13F portfolio. Sitting at the No. 2 spot is Howard Marks of Oaktree Capital Management, with a $37.1 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions consist of Jon Bauer's Contrarian Capital, Mark Moore's ThornTree Capital Partners and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position ThornTree Capital Partners allocated the biggest weight to Azul S.A. (NYSE:AZUL), around 5.39% of its 13F portfolio. ZWEIG DIMENNA PARTNERS is also relatively very bullish on the stock, designating 3.44 percent of its 13F equity portfolio to AZUL.
Judging by the fact that Azul S.A. (NYSE:AZUL) has faced declining sentiment from the smart money, it's easy to see that there lies a certain "tier" of money managers that elected to cut their positions entirely by the end of the third quarter. Interestingly, Gregg Moskowitz's Interval Partners dumped the largest position of all the hedgies watched by Insider Monkey, comprising close to $1.6 million in stock, and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital was right behind this move, as the fund dropped about $0.6 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 1 funds by the end of the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Azul S.A. (NYSE:AZUL) but similarly valued. These stocks are New Jersey Resources Corporation (NYSE:NJR), Insperity Inc (NYSE:NSP), National Fuel Gas Company (NYSE:NFG), and Healthequity Inc (NASDAQ:HQY). This group of stocks' market valuations are closest to AZUL's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NJR,14,82886,2 NSP,24,342641,0 NFG,20,211706,-2 HQY,19,212797,-4 Average,19.25,212508,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $213 million. That figure was $134 million in AZUL's case. Insperity Inc (NYSE:NSP) is the most popular stock in this table. On the other hand New Jersey Resources Corporation (NYSE:NJR) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Azul S.A. (NYSE:AZUL) is even less popular than NJR. Hedge funds dodged a bullet by taking a bearish stance towards AZUL. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately AZUL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AZUL investors were disappointed as the stock returned 4% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.