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Do Hedge Funds Love Embraer SA (ERJ)?

Legendary investors such as Leon Cooperman and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don’t publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That’s why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Embraer SA (NYSE:ERJ) from the perspective of those elite funds.

Is Embraer SA (NYSE:ERJ) a healthy stock for your portfolio? Prominent investors are getting more optimistic. The number of long hedge fund positions went up by 2 lately. Our calculations also showed that ERJ isn’t among the 30 most popular stocks among hedge funds. ERJ was in 11 hedge funds’ portfolios at the end of September. There were 9 hedge funds in our database with ERJ holdings at the end of the previous quarter.

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 18 percentage points since May 2014 through December 3, 2018 (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.

Discovery Capital Management

We’re going to take a gander at the latest hedge fund action regarding Embraer SA (NYSE:ERJ).

How are hedge funds trading Embraer SA (NYSE:ERJ)?

At the end of the third quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 22% from the previous quarter. By comparison, 13 hedge funds held shares or bullish call options in ERJ heading into this year. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

ERJ_dec2018

Of the funds tracked by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the biggest position in Embraer SA (NYSE:ERJ). AQR Capital Management has a $80.3 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, led by Jim Simons, holding a $11.4 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining peers that hold long positions consist of Rob Citrone’s Discovery Capital Management, Israel Englander’s Millennium Management and Phill Gross and Robert Atchinson’s Adage Capital Management.

With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. Point72 Asset Management, managed by Steve Cohen, established the largest position in Embraer SA (NYSE:ERJ). Point72 Asset Management had $2.8 million invested in the company at the end of the quarter. David Kowitz and Sheldon Kasowitz’s Indus Capital also made a $0.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace’s Marshall Wace LLP, Ken Griffin’s Citadel Investment Group, and Matthew Tewksbury’s Stevens Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Embraer SA (NYSE:ERJ) but similarly valued. These stocks are Manhattan Associates, Inc. (NASDAQ:MANH), Platform Specialty Products Corporation (NYSE:PAH), MasTec, Inc. (NYSE:MTZ), and Regal Beloit Corporation (NYSE:RBC). All of these stocks’ market caps resemble ERJ’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MANH 23 271268 7
PAH 24 1347697 -3
MTZ 30 652548 8
RBC 17 114508 4
Average 23.5 596505 4

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $597 million. That figure was $126 million in ERJ’s case. MasTec, Inc. (NYSE:MTZ) is the most popular stock in this table. On the other hand Regal Beloit Corporation (NYSE:RBC) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Embraer SA (NYSE:ERJ) is even less popular than RBC. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

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

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