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Here’s What Hedge Funds Think About Embraer SA (ERJ)

Asma UL Husna

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.

Embraer SA (NYSE:ERJ) was in 10 hedge funds' portfolios at the end of December. ERJ has seen a decrease in hedge fund interest lately. There were 11 hedge funds in our database with ERJ positions at the end of the previous quarter. Our calculations also showed that ERJ isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Phill Gross, Adage Capital Management

We're going to analyze the latest hedge fund action surrounding Embraer SA (NYSE:ERJ).

How have hedgies been trading Embraer SA (NYSE:ERJ)?

At the end of the fourth quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the second quarter of 2018. On the other hand, there were a total of 12 hedge funds with a bullish position in ERJ a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

ERJ_apr2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Rob Citrone's Discovery Capital Management has the biggest position in Embraer SA (NYSE:ERJ), worth close to $20.6 million, corresponding to 1.7% of its total 13F portfolio. The second most bullish fund manager is AQR Capital Management, managed by Cliff Asness, which holds a $14.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors with similar optimism contain Phill Gross and Robert Atchinson's Adage Capital Management, Jim Simons's Renaissance Technologies and Israel Englander's Millennium Management.

Because Embraer SA (NYSE:ERJ) has faced a decline in interest from hedge fund managers, it's easy to see that there exists a select few money managers who sold off their positions entirely heading into Q3. It's worth mentioning that Israel Englander's Millennium Management said goodbye to the biggest stake of all the hedgies tracked by Insider Monkey, totaling close to $2.7 million in stock. Matthew Tewksbury's fund, Stevens Capital Management, also sold off its stock, about $0.3 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds heading into Q3.

Let's now take a look at hedge fund activity in other stocks similar to Embraer SA (NYSE:ERJ). These stocks are PacWest Bancorp (NASDAQ:PACW), Kinross Gold Corporation (NYSE:KGC), Murphy Oil Corporation (NYSE:MUR), and New Jersey Resources Corp (NYSE:NJR). This group of stocks' market caps resemble ERJ's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PACW,21,209624,-5 KGC,17,300562,-1 MUR,18,181712,-5 NJR,18,92769,6 Average,18.5,196167,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $196 million. That figure was $74 million in ERJ's case. PacWest Bancorp (NASDAQ:PACW) is the most popular stock in this table. On the other hand Kinross Gold Corporation (NYSE:KGC) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Embraer SA (NYSE:ERJ) is even less popular than KGC. Hedge funds dodged a bullet by taking a bearish stance towards ERJ. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately ERJ wasn't nearly as popular as these 15 stock (hedge fund sentiment was very bearish); ERJ investors were disappointed as the stock returned -10.6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.

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

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