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Do Hedge Funds Love GrafTech International Ltd. (EAF)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded GrafTech International Ltd. (NYSE:EAF) and determine whether the smart money was really smart about this stock.

Is GrafTech International Ltd. (NYSE:EAF) going to take off soon? The smart money was buying. The number of bullish hedge fund positions increased by 1 recently. GrafTech International Ltd. (NYSE:EAF) was in 24 hedge funds’ portfolios at the end of June. The all time high for this statistics is 33. Our calculations also showed that EAF isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 56 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.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s take a look at the recent hedge fund action surrounding GrafTech International Ltd. (NYSE:EAF).

Hedge fund activity in GrafTech International Ltd. (NYSE:EAF)

At the end of the second quarter, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. By comparison, 27 hedge funds held shares or bullish call options in EAF a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

The largest stake in GrafTech International Ltd. (NYSE:EAF) was held by Yacktman Asset Management, which reported holding $41.7 million worth of stock at the end of September. It was followed by Indus Capital with a $27 million position. Other investors bullish on the company included Arrowstreet Capital, AQR Capital Management, and Goodnow Investment Group. In terms of the portfolio weights assigned to each position Indus Capital allocated the biggest weight to GrafTech International Ltd. (NYSE:EAF), around 4.43% of its 13F portfolio. MIC Capital Partners is also relatively very bullish on the stock, earmarking 0.75 percent of its 13F equity portfolio to EAF.

Now, key hedge funds were breaking ground themselves. GLG Partners, managed by Noam Gottesman, established the largest position in GrafTech International Ltd. (NYSE:EAF). GLG Partners had $2.8 million invested in the company at the end of the quarter. Bruce Kovner’s Caxton Associates LP also initiated a $0.6 million position during the quarter. The other funds with new positions in the stock are Karim Abbadi and Edward McBride’s Centiva Capital, Mika Toikka’s AlphaCrest Capital Management, and Greg Eisner’s Engineers Gate Manager.

Let’s also examine hedge fund activity in other stocks similar to GrafTech International Ltd. (NYSE:EAF). These stocks are Macy’s, Inc. (NYSE:M), GATX Corporation (NYSE:GATX), Investors Bancorp, Inc. (NASDAQ:ISBC), AMN Healthcare Services Inc (NYSE:AMN), Triton International Limited (NYSE:TRTN), Assured Guaranty Ltd. (NYSE:AGO), and Murphy Oil Corporation (NYSE:MUR). This group of stocks’ market valuations are closest to EAF’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
M 36 412417 6
GATX 17 152806 4
ISBC 25 127448 -1
AMN 21 61749 -1
TRTN 14 44903 2
AGO 25 218746 -3
MUR 15 86330 -5
Average 21.9 157771 0.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.9 hedge funds with bullish positions and the average amount invested in these stocks was $158 million. That figure was $125 million in EAF’s case. Macy’s, Inc. (NYSE:M) is the most popular stock in this table. On the other hand Triton International Limited (NYSE:TRTN) is the least popular one with only 14 bullish hedge fund positions. GrafTech International Ltd. (NYSE:EAF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for EAF is 50.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately EAF wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EAF were disappointed as the stock returned -10% 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.