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Were Hedge Funds Right About Loading Up On The Gap Inc. (GPS)?

Abigail Fisher
·6 min read

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 (Recession is Imminent: We Need A Travel Ban NOW). 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 The Gap Inc. (NYSE:GPS).

Is The Gap Inc. (NYSE:GPS) worth your attention right now? Money managers were in an optimistic mood. The number of bullish hedge fund positions went up by 14 in recent months. The Gap Inc. (NYSE:GPS) was in 38 hedge funds' portfolios at the end of June. The all time high for this statistics is 37. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that GPS 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.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 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.

Third Point 2014 Q3 Investor Letter
Third Point 2014 Q3 Investor Letter

Dan Loeb of Third Point

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 analyze the new hedge fund action surrounding The Gap Inc. (NYSE:GPS).

How are hedge funds trading The Gap Inc. (NYSE:GPS)?

Heading into the third quarter of 2020, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 58% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in GPS over the last 20 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

Is GPS A Good Stock To Buy?
Is GPS A Good Stock To Buy?

The largest stake in The Gap Inc. (NYSE:GPS) was held by Candlestick Capital Management, which reported holding $80 million worth of stock at the end of June. It was followed by AQR Capital Management with a $79.1 million position. Other investors bullish on the company included Suvretta Capital Management, Arrowstreet Capital, and Third Point. In terms of the portfolio weights assigned to each position Candlestick Capital Management allocated the biggest weight to The Gap Inc. (NYSE:GPS), around 2.91% of its 13F portfolio. Suvretta Capital Management is also relatively very bullish on the stock, designating 1.36 percent of its 13F equity portfolio to GPS.

As industrywide interest jumped, key hedge funds have jumped into The Gap Inc. (NYSE:GPS) headfirst. Candlestick Capital Management, managed by Jack Woodruff, assembled the most outsized position in The Gap Inc. (NYSE:GPS). Candlestick Capital Management had $80 million invested in the company at the end of the quarter. Aaron Cowen's Suvretta Capital Management also made a $63.1 million investment in the stock during the quarter. The other funds with brand new GPS positions are Dan Loeb's Third Point, Alexander Mitchell's Scopus Asset Management, and Joseph Samuels's Islet Management.

Let's go over hedge fund activity in other stocks similar to The Gap Inc. (NYSE:GPS). We will take a look at Terminix Global Holdings, Inc. (NYSE:SERV), Primerica, Inc. (NYSE:PRI), Targa Resources Corp (NYSE:TRGP), BlackLine, Inc. (NASDAQ:BL), Ultragenyx Pharmaceutical Inc (NASDAQ:RARE), Cullen/Frost Bankers, Inc. (NYSE:CFR), and Leggett & Platt, Inc. (NYSE:LEG). This group of stocks' market caps are similar to GPS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SERV,35,725891,4 PRI,25,385205,2 TRGP,31,289537,2 BL,18,227498,0 RARE,24,352560,6 CFR,13,21532,-5 LEG,29,184075,4 Average,25,312328,1.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $312 million. That figure was $459 million in GPS's case. Terminix Global Holdings, Inc. (NYSE:SERV) is the most popular stock in this table. On the other hand Cullen/Frost Bankers, Inc. (NYSE:CFR) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks The Gap Inc. (NYSE:GPS) is more popular among hedge funds. Our overall hedge fund sentiment score for GPS is 90. 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 returned 23% in 2020 through October 30th but still managed to beat the market by 20.1 percentage points. Hedge funds were also right about betting on GPS as the stock returned 54.1% since the end of June (through 10/30) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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