How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding The Gap Inc. (NYSE:GPS) and determine whether hedge funds had an edge regarding this stock.
Is The Gap Inc. (NYSE:GPS) a bargain? Investors who are in the know were buying. The number of long hedge fund bets improved by 14 lately. The Gap Inc. (NYSE:GPS) was in 38 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 37. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that GPS isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Cliff Asness of AQR Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now we're going to view the fresh hedge fund action encompassing The Gap Inc. (NYSE:GPS).
How are hedge funds trading The Gap Inc. (NYSE:GPS)?
At the end of the second quarter, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of 58% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards GPS over the last 20 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Jack Woodruff's Candlestick Capital Management has the largest position in The Gap Inc. (NYSE:GPS), worth close to $80 million, amounting to 2.9% of its total 13F portfolio. Coming in second is AQR Capital Management, managed by Cliff Asness, which holds a $79.1 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other peers that hold long positions contain Aaron Cowen's Suvretta Capital Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Dan Loeb's Third Point. In terms of the portfolio weights assigned to each position Candlestick Capital Management allocated the biggest weight to The Gap Inc. (NYSE:GPS), around 2.91% of its 13F portfolio. Suvretta Capital Management is also relatively very bullish on the stock, earmarking 1.36 percent of its 13F equity portfolio to GPS.
As one would reasonably expect, some big names were breaking ground themselves. Candlestick Capital Management, managed by Jack Woodruff, initiated the largest position in The Gap Inc. (NYSE:GPS). Candlestick Capital Management had $80 million invested in the company at the end of the quarter. Aaron Cowen's Suvretta Capital Management also initiated a $63.1 million position during the quarter. The following funds were also among the new GPS investors: Dan Loeb's Third Point, Alexander Mitchell's Scopus Asset Management, and Joseph Samuels's Islet Management.
Let's now take a look at hedge fund activity in other stocks similar to The Gap Inc. (NYSE:GPS). We will take a look at ServiceMaster Global Holdings Inc (NYSE:SERV), Primerica, Inc. (NYSE:PRI), Targa Resources Corp (NYSE:TRGP), BlackLine, Inc. (NASDAQ:BL), Ultragenyx Pharmaceutical Inc (NASDAQ:RARE), Cullen/Frost Bankers, Inc. (NYSE:CFR), and Leggett & Platt, Inc. (NYSE:LEG). 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 SERV,35,725891,4 PRI,25,385205,2 TRGP,31,289537,2 BL,18,227498,0 RARE,24,352560,6 CFR,13,21532,-5 LEG,29,184075,4 Average,25,312328,1.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $312 million. That figure was $459 million in GPS's case. ServiceMaster Global Holdings Inc (NYSE:SERV) is the most popular stock in this table. On the other hand Cullen/Frost Bankers, Inc. (NYSE:CFR) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks The Gap Inc. (NYSE:GPS) is more popular among hedge funds. Our overall hedge fund sentiment score for GPS is 90. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on GPS as the stock returned 37.8% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.