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Hedge Fund Consensus Stocks vs. Vale SA (VALE) In 2019

Nina Todic

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Vale SA (NYSE:VALE).

Is Vale SA (NYSE:VALE) the right pick for your portfolio? Prominent investors are in a bullish mood. The number of bullish hedge fund positions rose by 7 in recent months. Our calculations also showed that VALE 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' 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_26335" align="aligncenter" width="480"] Ken Fisher of Fisher Asset Management[/caption]

Ken Fisher FISHER ASSET MANAGEMENT

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. Keeping this in mind we're going to check out the recent hedge fund action regarding Vale SA (NYSE:VALE).

What have hedge funds been doing with Vale SA (NYSE:VALE)?

At the end of the third quarter, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards VALE 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.

Among these funds, Fisher Asset Management held the most valuable stake in Vale SA (NYSE:VALE), which was worth $385.3 million at the end of the third quarter. On the second spot was Orbis Investment Management which amassed $383.8 million worth of shares. Renaissance Technologies, Contrarian Capital, and Citadel Investment Group 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 Contrarian Capital allocated the biggest weight to Vale SA (NYSE:VALE), around 10.67% of its 13F portfolio. Orbis Investment Management is also relatively very bullish on the stock, setting aside 2.84 percent of its 13F equity portfolio to VALE.

As one would reasonably expect, key money managers were leading the bulls' herd. Adage Capital Management, managed by Phill Gross and Robert Atchinson, established the largest position in Vale SA (NYSE:VALE). Adage Capital Management had $23 million invested in the company at the end of the quarter. Todd J. Kantor's Encompass Capital Advisors also made a $8.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Jonathan Barrett and Paul Segal's Luminus Management, David Kowitz and Sheldon Kasowitz's Indus Capital, and Benjamin A. Smith's Laurion Capital Management.

Let's now review hedge fund activity in other stocks similar to Vale SA (NYSE:VALE). These stocks are The Blackstone Group Inc. (NYSE:BX), Crown Castle International Corp. (REIT) (NYSE:CCI), CIGNA Corporation (NYSE:CI), and Ecolab Inc. (NYSE:ECL). This group of stocks' market values are closest to VALE's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BX,41,1571733,11 CCI,34,1849678,1 CI,62,3080624,14 ECL,38,2169031,11 Average,43.75,2167767,9.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 43.75 hedge funds with bullish positions and the average amount invested in these stocks was $2168 million. That figure was $1454 million in VALE's case. CIGNA Corporation (NYSE:CI) is the most popular stock in this table. On the other hand Crown Castle International Corp. (REIT) (NYSE:CCI) is the least popular one with only 34 bullish hedge fund positions. Compared to these stocks Vale SA (NYSE:VALE) is even less popular than CCI. Hedge funds dodged a bullet by taking a bearish stance towards VALE. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately VALE wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); VALE investors were disappointed as the stock returned 0.8% in 2019 (through December 23rd) 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 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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