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Hedge Funds Are Buying GMS Inc. (GMS)

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like GMS Inc. (NYSE:GMS).

GMS Inc. (NYSE:GMS) was in 23 hedge funds’ portfolios at the end of the third quarter of 2019. GMS has experienced an increase in support from the world’s most elite money managers lately. There were 20 hedge funds in our database with GMS holdings at the end of the previous quarter. Our calculations also showed that GMS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 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.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Jeffrey Talpins of Element Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a gander at the fresh hedge fund action surrounding GMS Inc. (NYSE:GMS).

Hedge fund activity in GMS Inc. (NYSE:GMS)

At the end of the third quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 15% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in GMS a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in GMS Inc. (NYSE:GMS), which was worth $37.6 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $10.2 million worth of shares. Element Capital Management, Driehaus Capital, 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 Algert Coldiron Investors allocated the biggest weight to GMS Inc. (NYSE:GMS), around 1.03% of its 13F portfolio. Intrinsic Edge Capital is also relatively very bullish on the stock, dishing out 0.96 percent of its 13F equity portfolio to GMS.

Now, some big names were breaking ground themselves. Element Capital Management, managed by Jeffrey Talpins, initiated the largest position in GMS Inc. (NYSE:GMS). Element Capital Management had $10 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also initiated a $9.5 million position during the quarter. The following funds were also among the new GMS investors: Mark Coe’s Intrinsic Edge Capital, Noam Gottesman’s GLG Partners, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as GMS Inc. (NYSE:GMS) but similarly valued. These stocks are OneSmart International Education Group Limited (NYSE:ONE), United Fire Group, Inc. (NASDAQ:UFCS), Vicor Corp (NASDAQ:VICR), and New Mountain Finance Corp. (NYSE:NMFC). All of these stocks’ market caps resemble GMS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ONE 8 54613 1
UFCS 8 13556 -2
VICR 11 15736 -2
NMFC 15 40701 4
Average 10.5 31152 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $31 million. That figure was $130 million in GMS’s case. New Mountain Finance Corp. (NYSE:NMFC) is the most popular stock in this table. On the other hand OneSmart International Education Group Limited (NYSE:ONE) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks GMS Inc. (NYSE:GMS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on GMS, though not to the same extent, as the stock returned 7.8% during the fourth quarter (through the end of November) and outperformed the market as well.

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

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