How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding PPG Industries, Inc. (NYSE:PPG) and determine whether hedge funds had an edge regarding this stock.
Is PPG Industries, Inc. (NYSE:PPG) ready to rally soon? Hedge funds were getting more bullish. The number of long hedge fund bets advanced by 1 recently. PPG Industries, Inc. (NYSE:PPG) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 51. Our calculations also showed that PPG 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.
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 also 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 view the recent hedge fund action surrounding PPG Industries, Inc. (NYSE:PPG).
How are hedge funds trading PPG Industries, Inc. (NYSE:PPG)?
At Q2’s end, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards PPG over the last 20 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, AQR Capital Management held the most valuable stake in PPG Industries, Inc. (NYSE:PPG), which was worth $44 million at the end of the third quarter. On the second spot was Echo Street Capital Management which amassed $34.3 million worth of shares. Citadel Investment Group, Adage Capital Management, and Millennium 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 Appian Way Asset Management allocated the biggest weight to PPG Industries, Inc. (NYSE:PPG), around 6.69% of its 13F portfolio. Appian Way Asset Management is also relatively very bullish on the stock, designating 3.35 percent of its 13F equity portfolio to PPG.
With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Appian Way Asset Management, managed by Andrew Byington, established the largest position in PPG Industries, Inc. (NYSE:PPG). Appian Way Asset Management had $11.6 million invested in the company at the end of the quarter. John D. Gillespie’s Prospector Partners also initiated a $6.7 million position during the quarter. The other funds with new positions in the stock are Andrew Byington’s Appian Way Asset Management, Louis Bacon’s Moore Global Investments, and Lee Ainslie’s Maverick Capital.
Let’s go over hedge fund activity in other stocks similar to PPG Industries, Inc. (NYSE:PPG). These stocks are ANSYS, Inc. (NASDAQ:ANSS), Okta, Inc. (NASDAQ:OKTA), HP Inc. (NYSE:HPQ), McKesson Corporation (NYSE:MCK), Public Service Enterprise Group Incorporated (NYSE:PEG), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), and Credit Suisse Group AG (NYSE:CS). This group of stocks’ market valuations match PPG’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 42.6 hedge funds with bullish positions and the average amount invested in these stocks was $1534 million. That figure was $261 million in PPG’s case. McKesson Corporation (NYSE:MCK) is the most popular stock in this table. On the other hand Credit Suisse Group AG (NYSE:CS) is the least popular one with only 14 bullish hedge fund positions. PPG Industries, Inc. (NYSE:PPG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PPG is 50.6. 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 beat the market by 23.2 percentage points. A small number of hedge funds were also right about betting on PPG, though not to the same extent, as the stock returned 14.1% during the first two months of Q3 and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.