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Did Hedge Funds Make The Right Call On Ferrari N.V. (RACE) ?

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 Ferrari N.V. (NYSE:RACE) and determine whether hedge funds had an edge regarding this stock.

Ferrari N.V. (NYSE:RACE) was in 29 hedge funds’ portfolios at the end of the first quarter of 2020. RACE investors should pay attention to a decrease in enthusiasm from smart money lately. There were 36 hedge funds in our database with RACE positions at the end of the previous quarter. Our calculations also showed that RACE 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).

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.

Dan Loeb THIRD POINT

Dan Loeb of Third Point

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. 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 let’s view the key hedge fund action surrounding Ferrari N.V. (NYSE:RACE).

How have hedgies been trading Ferrari N.V. (NYSE:RACE)?

At the end of the first quarter, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RACE over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Nicolai Tangen’s Ako Capital has the most valuable position in Ferrari N.V. (NYSE:RACE), worth close to $395.3 million, amounting to 8.3% of its total 13F portfolio. Coming in second is Daniel Sundheim of D1 Capital Partners, with a $375.5 million position; the fund has 3.9% of its 13F portfolio invested in the stock. Some other peers that are bullish consist of Anand Desai’s Darsana Capital Partners, Dan Loeb’s Third Point and Gabriel Plotkin’s Melvin Capital Management. In terms of the portfolio weights assigned to each position Alatus Capital allocated the biggest weight to Ferrari N.V. (NYSE:RACE), around 53.25% of its 13F portfolio. Aquamarine Capital Management is also relatively very bullish on the stock, dishing out 21.3 percent of its 13F equity portfolio to RACE.

Due to the fact that Ferrari N.V. (NYSE:RACE) has experienced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there were a few funds that decided to sell off their positions entirely last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dropped the biggest stake of the “upper crust” of funds tracked by Insider Monkey, worth about $50.5 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund cut about $13.7 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 7 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Ferrari N.V. (NYSE:RACE). These stocks are Norfolk Southern Corp. (NYSE:NSC), BCE Inc. (NYSE:BCE), Vodafone Group Plc (NASDAQ:VOD), and ABB Ltd (NYSE:ABB). This group of stocks’ market caps match RACE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NSC 51 1172825 -1
BCE 13 204550 -6
VOD 14 598782 -2
ABB 10 277115 0
Average 22 563318 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $563 million. That figure was $1730 million in RACE’s case. Norfolk Southern Corp. (NYSE:NSC) is the most popular stock in this table. On the other hand ABB Ltd (NYSE:ABB) is the least popular one with only 10 bullish hedge fund positions. Ferrari N.V. (NYSE:RACE) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately RACE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RACE were disappointed as the stock returned 12.9% during the same time period 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.