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Hedge Funds Piled Into W.R. Grace & Co. (GRA) At The Wrong Time

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title “Recession is Imminent: We Need A Travel Ban NOW”. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the fourth quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4 years and analyze what the smart money thinks of W.R. Grace & Co. (NYSE:GRA) based on that data.

Is W.R. Grace & Co. (NYSE:GRA) the right pick for your portfolio? Prominent investors are betting on the stock. The number of long hedge fund positions moved up by 3 in recent months. Our calculations also showed that GRA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

If you’d ask most investors, hedge funds are viewed as slow, outdated financial tools of the past. While there are greater than 8000 funds in operation at the moment, Our researchers hone in on the upper echelon of this club, about 850 funds. These money managers handle bulk of all hedge funds’ total capital, and by tracking their inimitable investments, Insider Monkey has formulated a few investment strategies that have historically beaten Mr. Market. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

Ric Dillon Diamond Hill Capital

Ric Dillon of Diamond Hill Capital

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind let’s take a look at the recent hedge fund action encompassing W.R. Grace & Co. (NYSE:GRA).

What does smart money think about W.R. Grace & Co. (NYSE:GRA)?

At Q4’s end, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from the third quarter of 2019. By comparison, 37 hedge funds held shares or bullish call options in GRA a year ago. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

The largest stake in W.R. Grace & Co. (NYSE:GRA) was held by 40 North Management, which reported holding $689.1 million worth of stock at the end of September. It was followed by Soroban Capital Partners with a $195 million position. Other investors bullish on the company included Echo Street Capital Management, Diamond Hill Capital, and Iridian Asset Management. In terms of the portfolio weights assigned to each position 40 North Management allocated the biggest weight to W.R. Grace & Co. (NYSE:GRA), around 48.65% of its 13F portfolio. Highline Capital Management is also relatively very bullish on the stock, dishing out 6.64 percent of its 13F equity portfolio to GRA.

Now, some big names have jumped into W.R. Grace & Co. (NYSE:GRA) headfirst. Locust Wood Capital Advisers, managed by Stephen J. Errico, initiated the most valuable position in W.R. Grace & Co. (NYSE:GRA). Locust Wood Capital Advisers had $22.1 million invested in the company at the end of the quarter. Martin D. Sass’s MD Sass also made a $10.6 million investment in the stock during the quarter. The other funds with new positions in the stock are John Overdeck and David Siegel’s Two Sigma Advisors, Joseph Samuels’s Islet Management, and Michael Gelband’s ExodusPoint Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as W.R. Grace & Co. (NYSE:GRA) but similarly valued. These stocks are Littelfuse, Inc. (NASDAQ:LFUS), Beyond Meat, Inc. (NASDAQ:BYND), Ritchie Bros. Auctioneers Incorporated (NYSE:RBA), and Allakos Inc. (NASDAQ:ALLK). All of these stocks’ market caps are similar to GRA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LFUS 21 300976 3
BYND 19 69052 2
RBA 21 259769 7
ALLK 15 414366 -2
Average 19 261041 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $261 million. That figure was $1720 million in GRA’s case. Littelfuse, Inc. (NASDAQ:LFUS) is the most popular stock in this table. On the other hand Allakos Inc. (NASDAQ:ALLK) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks W.R. Grace & Co. (NYSE:GRA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th and still beat the market by 1.9 percentage points. Unfortunately GRA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on GRA were disappointed as the stock returned -34% during the first two months of 2020 (through March 9th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.

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

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