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Did Hedge Funds Drop The Ball On Companhia de Saneamento Básico do Estado de São Paulo – SABESP (SBS) ?

Nina Todic

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 Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year (through May 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. 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 Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS).

Is Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS) ready to rally soon? Prominent investors are becoming less hopeful. The number of long hedge fund bets fell by 1 in recent months. Our calculations also showed that sbs isn't among the 30 most popular stocks among hedge funds.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/caption]

AQR CAPITAL MANAGEMENT

We're going to check out the recent hedge fund action encompassing Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS).

Hedge fund activity in Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS)

At the end of the first quarter, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SBS over the last 15 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.

No of Hedge Funds with SBS Positions

Among these funds, AQR Capital Management held the most valuable stake in Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS), which was worth $118.4 million at the end of the first quarter. On the second spot was Impax Asset Management which amassed $71.9 million worth of shares. Moreover, Renaissance Technologies, Arrowstreet Capital, and Millennium Management were also bullish on Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS), allocating a large percentage of their portfolios to this stock.

Since Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS) has faced a decline in interest from the aggregate hedge fund industry, logic holds that there exists a select few hedge funds who were dropping their positions entirely in the third quarter. It's worth mentioning that Minhua Zhang's Weld Capital Management sold off the largest stake of all the hedgies tracked by Insider Monkey, valued at about $0.2 million in stock, and Matthew Hulsizer's PEAK6 Capital Management was right behind this move, as the fund dumped about $0.1 million worth. These moves are interesting, as total hedge fund interest fell by 1 funds in the third quarter.

Let's now take a look at hedge fund activity in other stocks similar to Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS). We will take a look at PRA Health Sciences Inc (NASDAQ:PRAH), Ceridian HCM Holding Inc. (NYSE:CDAY), Universal Display Corporation (NASDAQ:OLED), and Sealed Air Corporation (NYSE:SEE). This group of stocks' market valuations match SBS's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PRAH,28,411788,3 CDAY,30,987099,13 OLED,18,133100,8 SEE,29,1118989,-2 Average,26.25,662744,5.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $663 million. That figure was $330 million in SBS's case. Ceridian HCM Holding Inc. (NYSE:CDAY) is the most popular stock in this table. On the other hand Universal Display Corporation (NASDAQ:OLED) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE:SBS) is even less popular than OLED. Hedge funds clearly dropped the ball on SBS as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on SBS as the stock returned 19.3% during the same period and outperformed the market by an even larger margin.

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

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