We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Afya Limited (NASDAQ:AFYA) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Is Afya Limited (NASDAQ:AFYA) the right investment to pursue these days? Investors who are in the know are taking a bullish view. The number of bullish hedge fund positions increased by 2 lately. Our calculations also showed that AFYA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
Scott Bessent of Key Square Capital Management
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s check out the recent hedge fund action regarding Afya Limited (NASDAQ:AFYA).
How are hedge funds trading Afya Limited (NASDAQ:AFYA)?
At the end of the fourth quarter, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 29% from one quarter earlier. On the other hand, there were a total of 0 hedge funds with a bullish position in AFYA 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.
The largest stake in Afya Limited (NASDAQ:AFYA) was held by Oaktree Capital Management, which reported holding $19.9 million worth of stock at the end of September. It was followed by Driehaus Capital with a $18.4 million position. Other investors bullish on the company included Key Square Capital Management, Arrowstreet Capital, and Highland Capital Management. In terms of the portfolio weights assigned to each position Key Square Capital Management allocated the biggest weight to Afya Limited (NASDAQ:AFYA), around 3.91% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, setting aside 0.49 percent of its 13F equity portfolio to AFYA.
As one would reasonably expect, some big names have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the most outsized position in Afya Limited (NASDAQ:AFYA). Arrowstreet Capital had $1.4 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also made a $1 million investment in the stock during the quarter. The following funds were also among the new AFYA investors: Ken Griffin’s Citadel Investment Group and D. E. Shaw’s D E Shaw.
Let’s check out hedge fund activity in other stocks similar to Afya Limited (NASDAQ:AFYA). We will take a look at Arco Platform Limited (NASDAQ:ARCE), The Ensign Group, Inc. (NASDAQ:ENSG), Saia Inc (NASDAQ:SAIA), and Pluralsight, Inc. (NASDAQ:PS). All of these stocks’ market caps are similar to AFYA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ARCE | 17 | 169461 | 5 |
| ENSG | 15 | 126763 | -3 |
| SAIA | 17 | 86146 | 1 |
| PS | 18 | 152506 | -4 |
| Average | 16.75 | 133719 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $134 million. That figure was $55 million in AFYA’s case. Pluralsight, Inc. (NASDAQ:PS) is the most popular stock in this table. On the other hand The Ensign Group, Inc. (NASDAQ:ENSG) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Afya Limited (NASDAQ:AFYA) is even less popular than ENSG. Hedge funds dodged a bullet by taking a bearish stance towards AFYA. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but managed to beat the market by 4.2 percentage points. Unfortunately AFYA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AFYA investors were disappointed as the stock returned -29.3% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
