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We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let's see whether Telefonica Brasil SA (NYSE:VIV) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Telefonica Brasil SA (NYSE:VIV) shareholders have witnessed a decrease in support from the world's most elite money managers lately. Our calculations also showed that VIV isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 S&P 500 ETFs by more than 41 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind we're going to take a gander at the new hedge fund action surrounding Telefonica Brasil SA (NYSE:VIV).
What have hedge funds been doing with Telefonica Brasil SA (NYSE:VIV)?
Heading into the first quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in VIV a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
The largest stake in Telefonica Brasil SA (NYSE:VIV) was held by Moerus Capital Management, which reported holding $30 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $22.8 million position. Other investors bullish on the company included Arrowstreet Capital, Millennium Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position Moerus Capital Management allocated the biggest weight to Telefonica Brasil SA (NYSE:VIV), around 9.71% of its 13F portfolio. Teewinot Capital Advisers is also relatively very bullish on the stock, dishing out 0.77 percent of its 13F equity portfolio to VIV.
Seeing as Telefonica Brasil SA (NYSE:VIV) has faced declining sentiment from the smart money, we can see that there were a few funds who sold off their positions entirely heading into Q4. Intriguingly, Richard S. Pzena's Pzena Investment Management dropped the biggest position of all the hedgies watched by Insider Monkey, valued at an estimated $1.1 million in stock, and Thomas Bailard's Bailard Inc was right behind this move, as the fund dropped about $1.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds heading into Q4.
Let's now review hedge fund activity in other stocks similar to Telefonica Brasil SA (NYSE:VIV). We will take a look at Hormel Foods Corporation (NYSE:HRL), Realty Income Corporation (NYSE:O), STMicroelectronics N.V. (NYSE:STM), and Waste Connections, Inc. (NYSE:WCN). This group of stocks' market valuations are closest to VIV's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HRL,23,240372,1 O,26,394173,8 STM,17,146213,4 WCN,37,623995,3 Average,25.75,351188,4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $351 million. That figure was $98 million in VIV's case. Waste Connections, Inc. (NYSE:WCN) is the most popular stock in this table. On the other hand STMicroelectronics N.V. (NYSE:STM) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Telefonica Brasil SA (NYSE:VIV) is even less popular than STM. Hedge funds dodged a bullet by taking a bearish stance towards VIV. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but managed to beat the market by 3.1 percentage points. Unfortunately VIV wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); VIV investors were disappointed as the stock returned -20.3% during the same time period 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 most of these stocks already outperformed the market so far in Q1.
Disclosure: None. This article was originally published at Insider Monkey.