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How Did Petroleo Brasileiro S.A. – Petrobras (PBR) Compare Against Hedge Fund Darlings in 2019?

Debasis Saha

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. 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 Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR).

Is Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR) an excellent investment now? Prominent investors are reducing their bets on the stock. The number of long hedge fund positions fell by 2 in recent months. Our calculations also showed that PBR isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). PBR was in 30 hedge funds' portfolios at the end of the third quarter of 2019. There were 32 hedge funds in our database with PBR positions at the end of the previous quarter.

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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]

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We leave no stone unturned when looking for the next great investment idea. For example 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. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind let's take a peek at the recent hedge fund action surrounding Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR).

What does smart money think about Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR)?

Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards PBR over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is PBR A Good Stock To Buy?

The largest stake in Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR) was held by Renaissance Technologies, which reported holding $628.4 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $561.8 million position. Other investors bullish on the company included Contrarian Capital, HBK Investments, and Capital Growth Management. In terms of the portfolio weights assigned to each position Contrarian Capital allocated the biggest weight to Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR), around 9.65% of its 13F portfolio. Prince Street Capital Management is also relatively very bullish on the stock, designating 8.98 percent of its 13F equity portfolio to PBR.

Due to the fact that Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR) has faced a decline in interest from hedge fund managers, we can see that there was a specific group of fund managers who sold off their positions entirely in the third quarter. Intriguingly, Jeffrey Talpins's Element Capital Management cut the biggest investment of the "upper crust" of funds followed by Insider Monkey, valued at close to $26.6 million in stock, and Joseph Samuels's Islet Management was right behind this move, as the fund sold off about $13.6 million worth. These transactions are interesting, as total hedge fund interest dropped by 2 funds in the third quarter.

Let's now review hedge fund activity in other stocks similar to Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR). These stocks are PetroChina Company Limited (NYSE:PTR), QUALCOMM, Incorporated (NASDAQ:QCOM), Charter Communications, Inc. (NASDAQ:CHTR), and Rio Tinto plc (NYSE:RIO). This group of stocks' market values are closest to PBR's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PTR,11,106487,2 QCOM,55,1817218,-6 CHTR,63,8306950,-3 RIO,21,1491441,-3 Average,37.5,2930524,-2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.5 hedge funds with bullish positions and the average amount invested in these stocks was $2931 million. That figure was $2023 million in PBR's case. Charter Communications, Inc. (NASDAQ:CHTR) is the most popular stock in this table. On the other hand PetroChina Company Limited (NYSE:PTR) is the least popular one with only 11 bullish hedge fund positions. Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately PBR wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PBR investors were disappointed as the stock returned 24.2% in 2019 (as of 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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