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Did Hedge Funds Drop The Ball On BRF S.A. (BRFS) ?

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged during the first quarter. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 40% and 25% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the first 5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

BRF S.A. (NYSE:BRFS) investors should be aware of an increase in hedge fund sentiment of late. BRFS was in 10 hedge funds’ portfolios at the end of the first quarter of 2019. There were 9 hedge funds in our database with BRFS holdings at the end of the previous quarter. Our calculations also showed that brfs isn’t among the 30 most popular stocks among hedge funds.

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 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.

Howard Marks OAKTREE CAPITAL MANAGEMENT

We’re going to take a glance at the recent hedge fund action regarding BRF S.A. (NYSE:BRFS).

How have hedgies been trading BRF S.A. (NYSE:BRFS)?

Heading into the second quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in BRFS over the last 15 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with BRFS Positions

Among these funds, Oaktree Capital Management held the most valuable stake in BRF S.A. (NYSE:BRFS), which was worth $34.8 million at the end of the first quarter. On the second spot was QVT Financial which amassed $8.2 million worth of shares. Moreover, Point72 Asset Management, HBK Investments, and Millennium Management were also bullish on BRF S.A. (NYSE:BRFS), allocating a large percentage of their portfolios to this stock.

As aggregate interest increased, key hedge funds have jumped into BRF S.A. (NYSE:BRFS) headfirst. Point72 Asset Management, managed by Steve Cohen, established the most valuable position in BRF S.A. (NYSE:BRFS). Point72 Asset Management had $4.3 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $1.3 million position during the quarter. The only other fund with a brand new BRFS position is Cliff Asness’s AQR Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to BRF S.A. (NYSE:BRFS). We will take a look at Paylocity Holding Corp (NASDAQ:PCTY), Casey’s General Stores, Inc. (NASDAQ:CASY), BWX Technologies Inc (NYSE:BWXT), and Avnet, Inc. (NASDAQ:AVT). This group of stocks’ market valuations are closest to BRFS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PCTY 24 148784 10
CASY 18 51288 0
BWXT 18 107854 -1
AVT 17 586463 -7
Average 19.25 223597 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $224 million. That figure was $54 million in BRFS’s case. Paylocity Holding Corp (NASDAQ:PCTY) is the most popular stock in this table. On the other hand Avnet, Inc. (NASDAQ:AVT) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks BRF S.A. (NYSE:BRFS) is even less popular than AVT. Hedge funds clearly dropped the ball on BRFS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on BRFS as the stock returned 25.8% during the same period and outperformed the market by an even larger margin.

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

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