Did Hedge Funds Make The Right Call On PPG Industries, Inc. (PPG) ?

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 PPG Industries, Inc. (NYSE:PPG) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in PPG Industries, Inc. (NYSE:PPG) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Credit Suisse Group AG (NYSE:CS), Fresenius Medical Care AG & Co. (NYSE:FMS), and Trane Technologies plc (NYSE:TT) to gather more data points. Our calculations also showed that PPG 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.

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. Now let’s take a look at the recent hedge fund action encompassing PPG Industries, Inc. (NYSE:PPG).

What have hedge funds been doing with PPG Industries, Inc. (NYSE:PPG)?

At the end of the first quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PPG over the last 18 quarters. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

More specifically, Citadel Investment Group was the largest shareholder of PPG Industries, Inc. (NYSE:PPG), with a stake worth $92.1 million reported as of the end of September. Trailing Citadel Investment Group was D E Shaw, which amassed a stake valued at $39.9 million. Interval Partners, Renaissance Technologies, and AQR Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Interval Partners allocated the biggest weight to PPG Industries, Inc. (NYSE:PPG), around 2.99% of its 13F portfolio. Gotham Asset Management is also relatively very bullish on the stock, designating 0.52 percent of its 13F equity portfolio to PPG.

Because PPG Industries, Inc. (NYSE:PPG) has faced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of hedge funds that elected to cut their entire stakes last quarter. It’s worth mentioning that Alexander Mitchell’s Scopus Asset Management said goodbye to the biggest position of the 750 funds watched by Insider Monkey, valued at close to $20 million in stock. Louis Bacon’s fund, Moore Global Investments, also sold off its stock, about $6.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as PPG Industries, Inc. (NYSE:PPG) but similarly valued. We will take a look at Credit Suisse Group AG (NYSE:CS), Fresenius Medical Care AG & Co. (NYSE:FMS), Trane Technologies plc (NYSE:TT), and Cerner Corporation (NASDAQ:CERN). All of these stocks’ market caps are similar to PPG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $443 million. That figure was $393 million in PPG’s case. Cerner Corporation (NASDAQ:CERN) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. (NYSE:FMS) is the least popular one with only 10 bullish hedge fund positions. PPG Industries, Inc. (NYSE:PPG) 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on PPG as the stock returned 27.6% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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