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Is Gap (GPS) A Good Stock To Buy?

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Asma UL Husna
·6 min read
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Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks aren't doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to The Gap Inc. (NYSE:GPS) changed recently.

Is Gap (GPS) a good stock to buy now? Money managers were taking a pessimistic view. The number of long hedge fund positions were trimmed by 3 in recent months. The Gap Inc. (NYSE:GPS) was in 35 hedge funds' portfolios at the end of September. The all time high for this statistic is 38. Our calculations also showed that GPS isn't among the 30 most popular stocks among hedge funds (click for Q3 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

COATUE MANAGEMENT
COATUE MANAGEMENT

Philippe Laffont of Coatue Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. Now let's analyze the latest hedge fund action surrounding The Gap Inc. (NYSE:GPS).

Do Hedge Funds Think GPS Is A Good Stock To Buy Now?

At third quarter's end, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. On the other hand, there were a total of 27 hedge funds with a bullish position in GPS a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Among these funds, Suvretta Capital Management held the most valuable stake in The Gap Inc. (NYSE:GPS), which was worth $96.2 million at the end of the third quarter. On the second spot was Coatue Management which amassed $87 million worth of shares. Citadel Investment Group, Candlestick Capital Management, and D E Shaw were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Candlestick Capital Management allocated the biggest weight to The Gap Inc. (NYSE:GPS), around 1.74% of its 13F portfolio. Suvretta Capital Management is also relatively very bullish on the stock, earmarking 1.73 percent of its 13F equity portfolio to GPS.

Due to the fact that The Gap Inc. (NYSE:GPS) has witnessed a decline in interest from hedge fund managers, logic holds that there were a few funds that slashed their positions entirely last quarter. Intriguingly, Dan Loeb's Third Point dropped the largest investment of all the hedgies watched by Insider Monkey, valued at an estimated $37.9 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also dumped its stock, about $6.6 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as The Gap Inc. (NYSE:GPS) but similarly valued. We will take a look at SolarWinds Corporation (NYSE:SWI), Gentex Corporation (NASDAQ:GNTX), Gerdau SA (NYSE:GGB), Commerce Bancshares, Inc. (NASDAQ:CBSH), Perrigo Co Plc (NYSE:PRGO), CubeSmart (NYSE:CUBE), and American Airlines Group Inc (NASDAQ:AAL). This group of stocks' market valuations are closest to GPS's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SWI,15,2718441,-4 GNTX,40,603326,2 GGB,11,134303,1 CBSH,15,50769,-1 PRGO,29,370821,-4 CUBE,18,229025,-6 AAL,37,208177,-10 Average,23.6,616409,-3.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.6 hedge funds with bullish positions and the average amount invested in these stocks was $616 million. That figure was $635 million in GPS's case. Gentex Corporation (NASDAQ:GNTX) is the most popular stock in this table. On the other hand Gerdau SA (NYSE:GGB) is the least popular one with only 11 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. Our overall hedge fund sentiment score for GPS is 71. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on GPS as the stock returned 18.7% since the end of Q3 (through 12/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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