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Hedge Funds Are Buying The Gap Inc. (GPS)

Nina Todic

Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about The Gap Inc. (NYSE:GPS).

The Gap Inc. (NYSE:GPS) investors should be aware of an increase in hedge fund interest of late. GPS was in 25 hedge funds' portfolios at the end of September. There were 21 hedge funds in our database with GPS positions at the end of the previous quarter. 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 below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

If you'd ask most stock holders, hedge funds are assumed to be underperforming, old investment vehicles of yesteryear. While there are more than 8000 funds with their doors open today, Our experts hone in on the upper echelon of this group, approximately 750 funds. Most estimates calculate that this group of people preside over bulk of all hedge funds' total asset base, and by monitoring their best stock picks, Insider Monkey has revealed various investment strategies that have historically defeated the S&P 500 index. Insider Monkey's flagship short hedge fund strategy outrun the S&P 500 short ETFs by around 20 percentage points a year since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

[caption id="attachment_189632" align="aligncenter" width="450"] David Harding of Winton Capital Management[/caption]

David Harding

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a peek at the new hedge fund action encompassing The Gap Inc. (NYSE:GPS).

What have hedge funds been doing with The Gap Inc. (NYSE:GPS)?

Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 19% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GPS over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with GPS Positions

The largest stake in The Gap Inc. (NYSE:GPS) was held by AQR Capital Management, which reported holding $48 million worth of stock at the end of September. It was followed by Millennium Management with a $29.3 million position. Other investors bullish on the company included Winton Capital Management, Citadel Investment Group, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Cognios Capital allocated the biggest weight to The Gap Inc. (NYSE:GPS), around 0.84% of its portfolio. Ellington is also relatively very bullish on the stock, dishing out 0.36 percent of its 13F equity portfolio to GPS.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Laurion Capital Management, managed by Benjamin A. Smith, assembled the most valuable position in The Gap Inc. (NYSE:GPS). Laurion Capital Management had $8.2 million invested in the company at the end of the quarter. David Costen Haley's HBK Investments also made a $6.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Renaissance Technologies, Mike Vranos's Ellington, and Paul Marshall and Ian Wace's Marshall Wace.

Let's also examine hedge fund activity in other stocks similar to The Gap Inc. (NYSE:GPS). These stocks are The Middleby Corporation (NASDAQ:MIDD), Dolby Laboratories, Inc. (NYSE:DLB), HD Supply Holdings Inc (NASDAQ:HDS), and Charles River Laboratories International Inc. (NYSE:CRL). This group of stocks' market caps are similar to GPS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MIDD,23,348030,-4 DLB,27,538773,0 HDS,33,965472,3 CRL,32,875494,3 Average,28.75,681942,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $682 million. That figure was $148 million in GPS's case. HD Supply Holdings Inc (NASDAQ:HDS) is the most popular stock in this table. On the other hand The Middleby Corporation (NASDAQ:MIDD) is the least popular one with only 23 bullish hedge fund positions. The Gap Inc. (NYSE:GPS) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately GPS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); GPS investors were disappointed as the stock returned -2.9% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.

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

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