Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first half of 2019. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards The Gap Inc. (NYSE:GPS) to find out whether it was one of their high conviction long-term ideas.
The Gap Inc. (NYSE:GPS) has experienced a decrease in enthusiasm from smart money lately. GPS was in 21 hedge funds' portfolios at the end of June. There were 27 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 (view the video below). Video: Click the image to 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 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the new hedge fund action encompassing The Gap Inc. (NYSE:GPS).
What does smart money think about The Gap Inc. (NYSE:GPS)?
At Q2's end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in GPS a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, AQR Capital Management held the most valuable stake in The Gap Inc. (NYSE:GPS), which was worth $30.8 million at the end of the second quarter. On the second spot was Winton Capital Management which amassed $12.5 million worth of shares. Moreover, Arrowstreet Capital, Citadel Investment Group, and Citadel Investment Group were also bullish on The Gap Inc. (NYSE:GPS), allocating a large percentage of their portfolios to this stock.
Due to the fact that The Gap Inc. (NYSE:GPS) has experienced declining sentiment from hedge fund managers, logic holds that there was a specific group of hedgies who were dropping their full holdings by the end of the second quarter. At the top of the heap, Renaissance Technologies dropped the largest investment of all the hedgies watched by Insider Monkey, valued at an estimated $27.3 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also dropped its stock, about $15.9 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 6 funds by the end of the second quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as The Gap Inc. (NYSE:GPS) but similarly valued. These stocks are Pilgrim's Pride Corporation (NASDAQ:PPC), People's United Financial, Inc. (NASDAQ:PBCT), Buckeye Partners, L.P. (NYSE:BPL), and Dolby Laboratories, Inc. (NYSE:DLB). This group of stocks' market values are closest to GPS's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PPC,19,248654,5 PBCT,18,130104,-2 BPL,13,166135,8 DLB,27,502234,-2 Average,19.25,261782,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $262 million. That figure was $82 million in GPS's case. Dolby Laboratories, Inc. (NYSE:DLB) is the most popular stock in this table. On the other hand Buckeye Partners, L.P. (NYSE:BPL) is the least popular one with only 13 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. 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately GPS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on GPS were disappointed as the stock returned -2.1% during the third 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.