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Are Hedge Funds Right About Dumping Embraer SA (ERJ)?

Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about Embraer SA (NYSE:ERJ).

Embraer SA (NYSE:ERJ) investors should pay attention to a decrease in enthusiasm from smart money recently. ERJ was in 7 hedge funds’ portfolios at the end of the second quarter of 2019. There were 8 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 (view the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

Matthew Hulsizer PEAK6 Capital

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a gander at the fresh hedge fund action regarding Embraer SA (NYSE:ERJ).

What have hedge funds been doing with Embraer SA (NYSE:ERJ)?

At the end of the second quarter, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the first quarter of 2019. By comparison, 9 hedge funds held shares or bullish call options in ERJ a year ago. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

No of Hedge Funds with ERJ Positions

When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies holds the most valuable position in Embraer SA (NYSE:ERJ). Renaissance Technologies has a $18.9 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Renaissance Technologies’s heels is Millennium Management, managed by Israel Englander, which holds a $15.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other peers that hold long positions contain Cliff Asness’s AQR Capital Management, and Ken Griffin’s Citadel Investment Group.

Seeing as Embraer SA (NYSE:ERJ) has witnessed falling interest from hedge fund managers, we can see that there is a sect of hedge funds who were dropping their entire stakes last quarter. Interestingly, Rob Citrone’s Discovery Capital Management dropped the biggest position of all the hedgies tracked by Insider Monkey, totaling an estimated $18.9 million in call options, and David Kowitz and Sheldon Kasowitz’s Indus Capital was right behind this move, as the fund cut about $1 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Embraer SA (NYSE:ERJ) but similarly valued. These stocks are Pebblebrook Hotel Trust (NYSE:PEB), Umpqua Holdings Corporation (NASDAQ:UMPQ), LogMeIn Inc (NASDAQ:LOGM), and NorthWestern Corporation (NYSE:NWE). This group of stocks’ market values resemble ERJ’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PEB 13 98272 3
UMPQ 20 212334 0
LOGM 27 400281 0
NWE 15 188258 0
Average 18.75 224786 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $225 million. That figure was $51 million in ERJ’s case. LogMeIn Inc (NASDAQ:LOGM) is the most popular stock in this table. On the other hand Pebblebrook Hotel Trust (NYSE:PEB) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Embraer SA (NYSE:ERJ) is even less popular than PEB. Hedge funds dodged a bullet by taking a bearish stance towards ERJ. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately ERJ wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ERJ investors were disappointed as the stock returned -14.3% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.

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

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