Did Hedge Funds Make The Right Call On Stagnant On Graco Inc. (GGG) ?

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 Graco Inc. (NYSE:GGG) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in Graco Inc. (NYSE:GGG) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare GGG to other stocks including Carnival Corporation & plc (NYSE:CUK), Banco de Chile (NYSE:BCH), and Catalent Inc (NYSE:CTLT) to get a better sense of its popularity.

Video: 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 S&P 500 ETFs by more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Steven Cohen of Point72 Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we’re going to go over the recent hedge fund action encompassing Graco Inc. (NYSE:GGG).

How have hedgies been trading Graco Inc. (NYSE:GGG)?

At the end of the first quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GGG over the last 18 quarters. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Is GGG A Good Stock To Buy?

The largest stake in Graco Inc. (NYSE:GGG) was held by GAMCO Investors, which reported holding $79.2 million worth of stock at the end of September. It was followed by Hosking Partners with a $12.7 million position. Other investors bullish on the company included GLG Partners, Royce & Associates, and Winton Capital Management. In terms of the portfolio weights assigned to each position GAMCO Investors allocated the biggest weight to Graco Inc. (NYSE:GGG), around 0.94% of its 13F portfolio. Hosking Partners is also relatively very bullish on the stock, setting aside 0.44 percent of its 13F equity portfolio to GGG.

Judging by the fact that Graco Inc. (NYSE:GGG) has experienced bearish sentiment from the smart money, it’s easy to see that there was a specific group of funds that elected to cut their positions entirely by the end of the first quarter. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management sold off the largest investment of the “upper crust” of funds watched by Insider Monkey, worth an estimated $10.8 million in stock, and Bernard Selz’s Selz Capital was right behind this move, as the fund sold off about $7.8 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Graco Inc. (NYSE:GGG) but similarly valued. We will take a look at Carnival Corporation & plc (NYSE:CUK), Banco de Chile (NYSE:BCH), Catalent Inc (NYSE:CTLT), and Citizens Financial Group Inc (NYSE:CFG). This group of stocks’ market values are similar to GGG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CUK 9 41281 -5
BCH 4 34819 -6
CTLT 27 384560 6
CFG 46 828393 4
Average 21.5 322263 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $322 million. That figure was $158 million in GGG’s case. Citizens Financial Group Inc (NYSE:CFG) is the most popular stock in this table. On the other hand Banco de Chile (NYSE:BCH) is the least popular one with only 4 bullish hedge fund positions. Graco Inc. (NYSE:GGG) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately GGG wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); GGG investors were disappointed as the stock returned 12.1% since Q1 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 most of these stocks already outperformed the market in 2020.

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