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 (read our latest 10 coronavirus predictions).
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 take a look at whether Grifols SA (NASDAQ:GRFS) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.
Is Grifols SA (NASDAQ:GRFS) the right investment to pursue these days? The best stock pickers are selling. The number of long hedge fund positions shrunk by 1 in recent months. Our calculations also showed that GRFS isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
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.
[caption id="attachment_27480" align="aligncenter" width="400"] Israel Englander of Millennium Management[/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. Now let's analyze the new hedge fund action surrounding Grifols SA (NASDAQ:GRFS).
How have hedgies been trading Grifols SA (NASDAQ:GRFS)?
At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in GRFS a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
More specifically, Ako Capital was the largest shareholder of Grifols SA (NASDAQ:GRFS), with a stake worth $288.9 million reported as of the end of September. Trailing Ako Capital was Millennium Management, which amassed a stake valued at $98.9 million. Farallon Capital, Whitebox Advisors, and Soros Fund Management 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 Soleus Capital allocated the biggest weight to Grifols SA (NASDAQ:GRFS), around 10.17% of its 13F portfolio. Ako Capital is also relatively very bullish on the stock, earmarking 6.22 percent of its 13F equity portfolio to GRFS.
Since Grifols SA (NASDAQ:GRFS) has witnessed a decline in interest from the smart money, logic holds that there were a few money managers who sold off their positions entirely by the end of the third quarter. It's worth mentioning that Nicolai Tangen's Ako Capital dumped the biggest investment of the 750 funds watched by Insider Monkey, totaling about $243.7 million in stock. Michael Gelband's fund, ExodusPoint Capital, also dumped its stock, about $1.5 million worth. These transactions are interesting, as total hedge fund interest dropped by 1 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Grifols SA (NASDAQ:GRFS). These stocks are NortonLifeLock Inc. (NASDAQ:NLOK), Roku, Inc. (NASDAQ:ROKU), Avangrid, Inc. (NYSE:AGR), and Markel Corporation (NYSE:MKL). This group of stocks' market caps match GRFS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NLOK,46,1623946,5 ROKU,34,231771,-5 AGR,19,370291,3 MKL,37,1409964,6 Average,34,908993,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $909 million. That figure was $767 million in GRFS's case. NortonLifeLock Inc. (NASDAQ:NLOK) is the most popular stock in this table. On the other hand Avangrid, Inc. (NYSE:AGR) is the least popular one with only 19 bullish hedge fund positions. Grifols SA (NASDAQ:GRFS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately GRFS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); GRFS investors were disappointed as the stock returned -30.1% 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 in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.Disclosure: None. This article was originally published at Insider Monkey.