Here’s What Hedge Funds Think About Valvoline Inc. (VVV)

Nina Todic

Wed, Jun 19, 2019, 6:44 PM

Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the second quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 6.6 percentage points through May 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.

Is Valvoline Inc. (NYSE:VVV) a safe investment today? The best stock pickers are turning bullish. The number of long hedge fund positions increased by 1 recently. Our calculations also showed that vvv isn't among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

Let's go over the fresh hedge fund action encompassing Valvoline Inc. (NYSE:VVV).

How have hedgies been trading Valvoline Inc. (NYSE:VVV)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the fourth quarter of 2018. On the other hand, there were a total of 12 hedge funds with a bullish position in VVV a year ago. With hedgies' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Among these funds, Adage Capital Management held the most valuable stake in Valvoline Inc. (NYSE:VVV), which was worth $91.3 million at the end of the first quarter. On the second spot was Tensile Capital which amassed $57 million worth of shares. Moreover, Cardinal Capital, GAMCO Investors, and Citadel Investment Group were also bullish on Valvoline Inc. (NYSE:VVV), allocating a large percentage of their portfolios to this stock.

Consequently, key money managers have been driving this bullishness. Blue Mountain Capital, managed by Andrew Feldstein and Stephen Siderow, assembled the most valuable position in Valvoline Inc. (NYSE:VVV). Blue Mountain Capital had $3.9 million invested in the company at the end of the quarter. David Costen Haley's HBK Investments also initiated a $0.3 million position during the quarter.

Let's also examine hedge fund activity in other stocks similar to Valvoline Inc. (NYSE:VVV). We will take a look at Embraer SA (NYSE:ERJ), Colfax Corporation (NYSE:CFX), LHC Group, Inc. (NASDAQ:LHCG), and Echostar Corporation (NASDAQ:SATS). All of these stocks' market caps match VVV's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ERJ,8,83463,-2 CFX,32,667763,5 LHCG,23,109472,-4 SATS,29,410078,-5 Average,23,317694,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $318 million. That figure was $306 million in VVV's case. Colfax Corporation (NYSE:CFX) is the most popular stock in this table. On the other hand Embraer SA (NYSE:ERJ) is the least popular one with only 8 bullish hedge fund positions. Valvoline Inc. (NYSE:VVV) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately VVV wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); VVV investors were disappointed as the stock returned -4% 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 13 of these stocks already outperformed the market so far in Q2.

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

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