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 Griffon Corporation (NYSE:GFF) and determine whether hedge funds had an edge regarding this stock.
Is Griffon Corporation (NYSE:GFF) going to take off soon? Money managers were in a bullish mood. The number of long hedge fund positions inched up by 1 in recent months. Our calculations also showed that GFF isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). GFF was in 13 hedge funds' portfolios at the end of March. There were 12 hedge funds in our database with GFF positions at the end of the previous quarter. 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 58 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_30600" align="aligncenter" width="400"] Bruce Kovner of Caxton Associates LP[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 15 largest gold producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we're going to take a look at the recent hedge fund action encompassing Griffon Corporation (NYSE:GFF).
Hedge fund activity in Griffon Corporation (NYSE:GFF)
Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in GFF over the last 18 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Griffon Corporation (NYSE:GFF) was held by GAMCO Investors, which reported holding $60.6 million worth of stock at the end of September. It was followed by Royce & Associates with a $5.6 million position. Other investors bullish on the company included Arrowstreet Capital, Citadel Investment Group, and Renaissance Technologies. In terms of the portfolio weights assigned to each position GAMCO Investors allocated the biggest weight to Griffon Corporation (NYSE:GFF), around 0.72% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 0.08 percent of its 13F equity portfolio to GFF.
As industrywide interest jumped, key hedge funds were leading the bulls' herd. Engineers Gate Manager, managed by Greg Eisner, assembled the most valuable position in Griffon Corporation (NYSE:GFF). Engineers Gate Manager had $0.4 million invested in the company at the end of the quarter. Jonathan Soros's JS Capital also initiated a $0.2 million position during the quarter. The only other fund with a brand new GFF position is Matthew Hulsizer's PEAK6 Capital Management.
Let's check out hedge fund activity in other stocks similar to Griffon Corporation (NYSE:GFF). We will take a look at China Online Education Group (NYSE:COE), Malibu Boats Inc (NASDAQ:MBUU), Meridian Bancorp, Inc. (NASDAQ:EBSB), and Herc Holdings Inc. (NYSE:HRI). This group of stocks' market caps are closest to GFF's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COE,4,19972,1 MBUU,16,71820,0 EBSB,12,55305,0 HRI,17,232260,-4 Average,12.25,94839,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $73 million in GFF's case. Herc Holdings Inc. (NYSE:HRI) is the most popular stock in this table. On the other hand China Online Education Group (NYSE:COE) is the least popular one with only 4 bullish hedge fund positions. Griffon Corporation (NYSE:GFF) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on GFF as the stock returned 38.5% in Q2 (through June 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.