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Is Grifols SA (GRFS) Going to Burn These Hedge Funds?

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 Grifols SA (NASDAQ:GRFS) and determine whether hedge funds had an edge regarding this stock.

Is Grifols SA (NASDAQ:GRFS) the right investment to pursue these days? Prominent investors were cutting their exposure. The number of bullish hedge fund bets shrunk by 2 recently. Grifols SA (NASDAQ:GRFS) was in 21 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 23. Our calculations also showed that GRFS 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.

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 S&P 500 ETFs by 58 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.

Andy Redleaf Andrew Redleaf Whitebox Advisors

Andy Redleaf of Whitebox Advisors

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 lithium company which could also benefit from the electric car adoption. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s take a peek at the new hedge fund action surrounding Grifols SA (NASDAQ:GRFS).

How have hedgies been trading Grifols SA (NASDAQ:GRFS)?

At Q2’s end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the first quarter of 2020. On the other hand, there were a total of 16 hedge funds with a bullish position in GRFS a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Ako Capital was the largest shareholder of Grifols SA (NASDAQ:GRFS), with a stake worth $223.9 million reported as of the end of September. Trailing Ako Capital was Nitorum Capital, which amassed a stake valued at $62.2 million. Farallon Capital, Soros Fund Management, and Whitebox Advisors 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 Ako Capital allocated the biggest weight to Grifols SA (NASDAQ:GRFS), around 3.91% of its 13F portfolio. Nitorum Capital is also relatively very bullish on the stock, earmarking 3.2 percent of its 13F equity portfolio to GRFS.

Seeing as Grifols SA (NASDAQ:GRFS) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there is a sect of fund managers that elected to cut their full holdings heading into Q3. It’s worth mentioning that Brian Ashford-Russell and Tim Woolley’s Polar Capital dropped the largest stake of the 750 funds tracked by Insider Monkey, valued at an estimated $12.7 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dropped about $8.5 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 2 funds heading into Q3.

Let’s check out hedge fund activity in other stocks similar to Grifols SA (NASDAQ:GRFS). We will take a look at Nucor Corporation (NYSE:NUE), FactSet Research Systems Inc. (NYSE:FDS), Seagate Technology plc (NASDAQ:STX), Masimo Corporation (NASDAQ:MASI), AngloGold Ashanti Limited (NYSE:AU), Godaddy Inc (NYSE:GDDY), and Cheniere Energy, Inc. (NYSE:LNG). This group of stocks’ market valuations match GRFS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NUE 26 115702 0
FDS 21 200608 0
STX 27 2100119 -5
MASI 32 160712 1
AU 16 726270 -3
GDDY 55 2539026 1
LNG 38 2123554 -1
Average 30.7 1137999 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.7 hedge funds with bullish positions and the average amount invested in these stocks was $1138 million. That figure was $583 million in GRFS’s case. Godaddy Inc (NYSE:GDDY) is the most popular stock in this table. On the other hand AngloGold Ashanti Limited (NYSE:AU) is the least popular one with only 16 bullish hedge fund positions. Grifols SA (NASDAQ:GRFS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for GRFS is 36.8. 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. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately GRFS wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); GRFS investors were disappointed as the stock returned -4.9% in the third 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.