At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards W.R. Grace & Co. (NYSE:GRA) at the end of the second quarter and determine whether the smart money was really smart about this stock.
W.R. Grace & Co. (NYSE:GRA) investors should pay attention to an increase in hedge fund sentiment in recent months. W.R. Grace & Co. (NYSE:GRA) was in 39 hedge funds’ portfolios at the end of June. The all time high for this statistics is 47. Our calculations also showed that GRA 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Ric Dillon of Diamond Hill Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. 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 read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let’s take a look at the fresh hedge fund action encompassing W.R. Grace & Co. (NYSE:GRA).
How have hedgies been trading W.R. Grace & Co. (NYSE:GRA)?
At the end of the second quarter, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GRA over the last 20 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
The largest stake in W.R. Grace & Co. (NYSE:GRA) was held by 40 North Management, which reported holding $501.2 million worth of stock at the end of September. It was followed by Soroban Capital Partners with a $138.8 million position. Other investors bullish on the company included Gates Capital Management, Lyrical Asset Management, and Diamond Hill Capital. 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 15.35% of its 13F portfolio. Atlantic Investment Management is also relatively very bullish on the stock, setting aside 8.57 percent of its 13F equity portfolio to GRA.
Now, specific money managers have been driving this bullishness. Lyrical Asset Management, managed by Andrew Wellington and Jeff Keswin, established the most valuable position in W.R. Grace & Co. (NYSE:GRA). Lyrical Asset Management had $99.5 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also made a $9.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Javier Velazquez’s Albar Capital, John A. Levin’s Levin Capital Strategies, and Qing Li’s Sciencast Management.
Let’s check out hedge fund activity in other stocks similar to W.R. Grace & Co. (NYSE:GRA). We will take a look at Nextera Energy Partners LP (NYSE:NEP), Envista Holdings Corporation (NYSE:NVST), RBC Bearings Incorporated (NASDAQ:ROLL), Mattel, Inc. (NASDAQ:MAT), Cosan Limited (NYSE:CZZ), Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), and Clean Harbors Inc (NYSE:CLH). This group of stocks’ market values are similar to GRA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NEP | 21 | 125356 | 0 |
| NVST | 21 | 395641 | -1 |
| ROLL | 17 | 61588 | 8 |
| MAT | 25 | 595357 | 8 |
| CZZ | 14 | 160277 | -1 |
| DCPH | 31 | 761061 | 3 |
| CLH | 19 | 237400 | -6 |
| Average | 21.1 | 333811 | 1.6 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.1 hedge funds with bullish positions and the average amount invested in these stocks was $334 million. That figure was $1297 million in GRA’s case. Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) is the most popular stock in this table. On the other hand Cosan Limited (NYSE:CZZ) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks W.R. Grace & Co. (NYSE:GRA) is more popular among hedge funds. Our overall hedge fund sentiment score for GRA is 83.9. 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. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Unfortunately GRA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on GRA were disappointed as the stock returned -19.3% since the end of the second quarter 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.
