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Was The Smart Money Right About Loading Up On Valvoline Inc. (VVV)?

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Abigail Fisher
·6 min read
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In this article we will take a look at whether hedge funds think Valvoline Inc. (NYSE:VVV) 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 Valvoline Inc. (NYSE:VVV) an attractive stock to buy now? The smart money was getting more optimistic. The number of bullish hedge fund positions went up by 1 lately. Valvoline Inc. (NYSE:VVV) was in 40 hedge funds' portfolios at the end of June. The all time high for this statistics is 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that VVV 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.

Steven Tananbaum - GoldenTree Asset Management
Steven Tananbaum - GoldenTree Asset Management

Steven Tananbaum of GoldenTree Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we're going to check out the key hedge fund action surrounding Valvoline Inc. (NYSE:VVV).

How are hedge funds trading Valvoline Inc. (NYSE:VVV)?

At Q2's end, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in VVV a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Is VVV A Good Stock To Buy?
Is VVV A Good Stock To Buy?

More specifically, HG Vora Capital Management was the largest shareholder of Valvoline Inc. (NYSE:VVV), with a stake worth $106.3 million reported as of the end of June. Trailing HG Vora Capital Management was Renaissance Technologies, which amassed a stake valued at $84.4 million. Eminence Capital, Tensile Capital, and D E Shaw 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 HG Vora Capital Management allocated the biggest weight to Valvoline Inc. (NYSE:VVV), around 9.56% of its 13F portfolio. Tensile Capital is also relatively very bullish on the stock, dishing out 9.2 percent of its 13F equity portfolio to VVV.

As one would reasonably expect, key money managers were leading the bulls' herd. Eminence Capital, managed by Ricky Sandler, created the most outsized position in Valvoline Inc. (NYSE:VVV). Eminence Capital had $68.5 million invested in the company at the end of the quarter. John Brennan's Sirios Capital Management also made a $16.2 million investment in the stock during the quarter. The other funds with brand new VVV positions are Steven Tananbaum's GoldenTree Asset Management, Ira Unschuld's Brant Point Investment Management, and Craig Peskin and Peter Fleiss's Solel Partners.

Let's check out hedge fund activity in other stocks similar to Valvoline Inc. (NYSE:VVV). These stocks are WPX Energy Inc (NYSE:WPX), Terreno Realty Corporation (NYSE:TRNO), Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), Medallia, Inc. (NYSE:MDLA), Black Hills Corporation (NYSE:BKH), Braskem SA (NYSE:BAK), and Physicians Realty Trust (NYSE:DOC). This group of stocks' market values resemble VVV's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WPX,37,230770,8 TRNO,9,29693,-1 ARNA,41,814569,5 MDLA,18,257841,-2 BKH,22,182307,4 BAK,7,36296,1 DOC,15,106429,-1 Average,21.3,236844,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.3 hedge funds with bullish positions and the average amount invested in these stocks was $237 million. That figure was $634 million in VVV's case. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is the most popular stock in this table. On the other hand Braskem SA (NYSE:BAK) is the least popular one with only 7 bullish hedge fund positions. Valvoline Inc. (NYSE:VVV) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VVV is 84.5. 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately VVV wasn't nearly as popular as these 10 stocks and hedge funds that were betting on VVV were disappointed as the stock returned 2.3% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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