Is Vale SA (ADR) (VALE) A Good Stock To Buy?

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility and underperformance. The time period between the end of June 2015 and the end of June 2016 was one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have been underperforming the large-cap indices. However, things have dramatically changed over the last 5 months. Small-cap stocks reversed their misfortune and beat the large cap indices by almost 11 percentage points since the end of June. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Vale SA (ADR) (NYSE:VALE).

Vale SA (ADR) (NYSE:VALE) shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. VALE was in 27 hedge funds’ portfolios at the end of September. There were 24 hedge funds in our database with VALE holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as General Growth Properties Inc (NYSE:GGP), The Allstate Corporation (NYSE:ALL), and Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

Hedge fund activity in Vale SA (ADR) (NYSE:VALE)

At Q3’s end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, an increase of 13% from the previous quarter. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Ken Heebner’s Capital Growth Management has the biggest position in Vale SA (ADR) (NYSE:VALE), worth close to $51.2 million, corresponding to 2.4% of its total 13F portfolio. The second most bullish fund manager is Renaissance Technologies, led by Jim Simons, holding a $43.1 million position. Other hedge funds and institutional investors that are bullish comprise Howard Marks’ Oaktree Capital Management, and Jon Bauer’s Contrarian Capital.

Consequently, specific money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, initiated the biggest position in Vale SA (ADR) (NYSE:VALE). Millennium Management had $30 million invested in the company at the end of the quarter. Alan Howard’s Brevan Howard also initiated a $6.1 million position during the quarter. The other funds with brand new VALE positions are Ken Griffin’s Citadel Investment Group, Benjamin A. Smith’s Laurion Capital Management, and Bart Baum’s Ionic Capital Management.

Let’s go over hedge fund activity in other stocks similar to Vale SA (ADR) (NYSE:VALE). These stocks are General Growth Properties Inc (NYSE:GGP), The Allstate Corporation (NYSE:ALL), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), and O’Reilly Automotive Inc (NASDAQ:ORLY). This group of stocks’ market caps resemble VALE’s market cap.

As you can see these stocks had an average of 35 hedge funds with bullish positions and the average amount invested in these stocks was $1.34 billion. That figure was $288 million in VALE’s case. Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is the most popular stock in this table. On the other hand General Growth Properties Inc (NYSE:GGP) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Vale SA (ADR) (NYSE:VALE) is even less popular than GGP. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None