Were Hedge Funds Right About Buying Gerdau SA (GGB)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Gerdau SA (NYSE:GGB) based on that data and determine whether they were really smart about the stock.

Is Gerdau SA (NYSE:GGB) a bargain? Prominent investors were in a bullish mood. The number of long hedge fund positions advanced by 5 in recent months. Our calculations also showed that GGB isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to review the new hedge fund action regarding Gerdau SA (NYSE:GGB).

How are hedge funds trading Gerdau SA (NYSE:GGB)?

At Q1’s end, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 71% from the previous quarter. By comparison, 10 hedge funds held shares or bullish call options in GGB a year ago. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Contrarian Capital, managed by Jon Bauer, holds the largest position in Gerdau SA (NYSE:GGB). Contrarian Capital has a $40.4 million position in the stock, comprising 21.2% of its 13F portfolio. On Contrarian Capital’s heels is Luminus Management, managed by Jonathan Barrett and Paul Segal, which holds a $18.4 million position; 1.9% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish encompass Ken Fisher’s Fisher Asset Management, Renaissance Technologies and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Contrarian Capital allocated the biggest weight to Gerdau SA (NYSE:GGB), around 21.16% of its 13F portfolio. Luminus Management is also relatively very bullish on the stock, designating 1.9 percent of its 13F equity portfolio to GGB.

Consequently, some big names were breaking ground themselves. Luminus Management, managed by Jonathan Barrett and Paul Segal, initiated the most outsized position in Gerdau SA (NYSE:GGB). Luminus Management had $18.4 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $9.3 million position during the quarter. The other funds with brand new GGB positions are Israel Englander’s Millennium Management, D. E. Shaw’s D E Shaw, and Donald Sussman’s Paloma Partners.

Let’s go over hedge fund activity in other stocks similar to Gerdau SA (NYSE:GGB). We will take a look at National Fuel Gas Company (NYSE:NFG), Safehold Inc. (NYSE:SAFE), Huntsman Corporation (NYSE:HUN), and Parsons Corporation (NYSE:PSN). This group of stocks’ market caps are closest to GGB’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NFG 18 104176 -8
SAFE 5 7608 -2
HUN 21 305231 -18
PSN 15 93372 5
Average 14.75 127597 -5.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $128 million. That figure was $89 million in GGB’s case. Huntsman Corporation (NYSE:HUN) is the most popular stock in this table. On the other hand Safehold Inc. (NYSE:SAFE) is the least popular one with only 5 bullish hedge fund positions. Gerdau SA (NYSE:GGB) is not the least popular stock in this group but hedge fund interest is still below average. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on GGB as the stock returned 55% during the second quarter and outperformed the market by an even larger margin.

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