U.S. Markets closed

GrafTech International Ltd. (EAF) vs. Top 20 Hedge Fund Stocks in 2019

Debasis Saha

2018's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.3% in 2019 and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards GrafTech International Ltd. (NYSE:EAF) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.

GrafTech International Ltd. (NYSE:EAF) investors should be aware of a decrease in hedge fund sentiment in recent months. Our calculations also showed that EAF 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).

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' 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.

MOHNISH PABRAI

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. 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 new hedge fund action regarding GrafTech International Ltd. (NYSE:EAF).

How have hedgies been trading GrafTech International Ltd. (NYSE:EAF)?

Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from one quarter earlier. By comparison, 31 hedge funds held shares or bullish call options in EAF a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is EAF A Good Stock To Buy?

More specifically, Pabrai Funds was the largest shareholder of GrafTech International Ltd. (NYSE:EAF), with a stake worth $71 million reported as of the end of September. Trailing Pabrai Funds was AQR Capital Management, which amassed a stake valued at $36.6 million. Yacktman Asset Management, Goodnow Investment Group, and Arrowstreet Capital 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 Pabrai Funds allocated the biggest weight to GrafTech International Ltd. (NYSE:EAF), around 27.17% of its 13F portfolio. Anchor Bolt Capital is also relatively very bullish on the stock, designating 4.36 percent of its 13F equity portfolio to EAF.

Because GrafTech International Ltd. (NYSE:EAF) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there were a few fund managers that elected to cut their positions entirely last quarter. Intriguingly, John R. Wagner's SCW Capital Management dropped the biggest stake of the 750 funds tracked by Insider Monkey, valued at close to $12.7 million in stock. Nathaniel August's fund, Mangrove Partners, also dumped its stock, about $11.1 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds last quarter.

Let's also examine hedge fund activity in other stocks similar to GrafTech International Ltd. (NYSE:EAF). We will take a look at Alcoa Corporation (NYSE:AA), Ardagh Group S.A. (NYSE:ARD), Apple Hospitality REIT Inc (NYSE:APLE), and Equitrans Midstream Corporation (NYSE:ETRN). This group of stocks' market values are closest to EAF's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AA,28,530144,2 ARD,12,63888,1 APLE,12,106485,-2 ETRN,16,334604,0 Average,17,258780,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $259 million. That figure was $276 million in EAF's case. Alcoa Corporation (NYSE:AA) is the most popular stock in this table. On the other hand Ardagh Group S.A. (NYSE:ARD) is the least popular one with only 12 bullish hedge fund positions. GrafTech International Ltd. (NYSE:EAF) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately EAF wasn't nearly as popular as these 20 stocks and hedge funds that were betting on EAF were disappointed as the stock returned 4.4% in 2019 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 many of these stocks already outperformed the market so far this year. 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.

Related Content