Should I Avoid Gravity Co., LTD. (GRVY)?

In this article we will check out the progression of hedge fund sentiment towards Gravity Co., LTD. (NASDAQ:GRVY) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Gravity Co., LTD. (NASDAQ:GRVY) was in 3 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 6. GRVY shareholders have witnessed a decrease in activity from the world’s largest hedge funds recently. There were 4 hedge funds in our database with GRVY positions at the end of the second quarter. Our calculations also showed that GRVY isn’t among the 30 most popular stocks among hedge funds (click for Q3 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 66 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.

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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. 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. Now let’s take a look at the key hedge fund action encompassing Gravity Co., LTD. (NASDAQ:GRVY).

How are hedge funds trading Gravity Co., LTD. (NASDAQ:GRVY)?

Heading into the fourth quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GRVY over the last 21 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, Arrowstreet Capital held the most valuable stake in Gravity Co., LTD. (NASDAQ:GRVY), which was worth $6.4 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $1.2 million worth of shares. Ancora Advisors was 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 Arrowstreet Capital allocated the biggest weight to Gravity Co., LTD. (NASDAQ:GRVY), around 0.01% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, setting aside 0.0036 percent of its 13F equity portfolio to GRVY.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified GRVY as a viable investment and initiated a position in the stock.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Gravity Co., LTD. (NASDAQ:GRVY) but similarly valued. We will take a look at Zogenix, Inc. (NASDAQ:ZGNX), Seacoast Banking Corporation of Florida (NASDAQ:SBCF), ePlus Inc. (NASDAQ:PLUS), StoneX Group Inc. (NASDAQ:SNEX), Tupperware Brands Corporation (NYSE:TUP), Eventbrite, Inc. (NYSE:EB), and Nkarta, Inc. (NASDAQ:NKTX). This group of stocks’ market caps resemble GRVY’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.9 hedge funds with bullish positions and the average amount invested in these stocks was $184 million. That figure was $8 million in GRVY’s case. Zogenix, Inc. (NASDAQ:ZGNX) is the most popular stock in this table. On the other hand Seacoast Banking Corporation of Florida (NASDAQ:SBCF) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Gravity Co., LTD. (NASDAQ:GRVY) is even less popular than SBCF. Our overall hedge fund sentiment score for GRVY is 19. 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. Hedge funds dodged a bullet by taking a bearish stance towards GRVY. 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 percentage points. These stocks gained 28.1% in 2020 through November 23rd but managed to beat the market again by 15.4 percentage points. Unfortunately GRVY wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); GRVY investors were disappointed as the stock returned -6.5% since the end of the third quarter (through 11/23) 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.

Disclosure: None. This article was originally published at Insider Monkey.