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At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Graco Inc. (NYSE:GGG) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Graco Inc. (NYSE:GGG) was in 32 hedge funds' portfolios at the end of June. The all time high for this statistics is 24. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. GGG shareholders have witnessed an increase in hedge fund sentiment recently. There were 21 hedge funds in our database with GGG holdings at the end of March. Our calculations also showed that GGG 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.
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 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 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.
Paul Marshall of Marshall Wace
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. 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 new hedge fund action regarding Graco Inc. (NYSE:GGG).
What does smart money think about Graco Inc. (NYSE:GGG)?
At Q2's end, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 52% from the first quarter of 2020. By comparison, 24 hedge funds held shares or bullish call options in GGG a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, GAMCO Investors held the most valuable stake in Graco Inc. (NYSE:GGG), which was worth $66.6 million at the end of the third quarter. On the second spot was Balyasny Asset Management which amassed $39.2 million worth of shares. Millennium Management, Renaissance Technologies, and Hosking Partners 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 GAMCO Investors allocated the biggest weight to Graco Inc. (NYSE:GGG), around 0.76% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, earmarking 0.63 percent of its 13F equity portfolio to GGG.
Now, key hedge funds were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the biggest position in Graco Inc. (NYSE:GGG). Balyasny Asset Management had $39.2 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors also made a $6.3 million investment in the stock during the quarter. The other funds with brand new GGG positions are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Paul Marshall and Ian Wace's Marshall Wace LLP, and Brandon Haley's Holocene Advisors.
Let's now take a look at hedge fund activity in other stocks similar to Graco Inc. (NYSE:GGG). We will take a look at LKQ Corporation (NASDAQ:LKQ), Entegris Inc (NASDAQ:ENTG), NRG Energy Inc (NYSE:NRG), Globe Life Inc. (NYSE:GL), Universal Health Services, Inc. (NYSE:UHS), Paylocity Holding Corp (NASDAQ:PCTY), and Regency Centers Corp (NASDAQ:REG). This group of stocks' market caps are similar to GGG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LKQ,44,1536917,3 ENTG,28,601485,9 NRG,36,1095466,-2 GL,33,706101,11 UHS,38,446238,8 PCTY,24,476733,-9 REG,15,124124,-3 Average,31.1,712438,2.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.1 hedge funds with bullish positions and the average amount invested in these stocks was $712 million. That figure was $205 million in GGG's case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Regency Centers Corp (NASDAQ:REG) is the least popular one with only 15 bullish hedge fund positions. Graco Inc. (NYSE:GGG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for GGG is 69.3. 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 gained 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. Hedge funds were also right about betting on GGG as the stock returned 27.2% during Q3 (through September 14th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.