U.S. markets close in 1 hour 27 minutes

2019 Review: Top Hedge Fund Stocks vs. American Financial Group (AFG)

Reymerlyn Martin

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding American Financial Group (NYSE:AFG) and see how the stock performed in comparison to hedge funds' consensus picks.

American Financial Group (NYSE:AFG) shareholders have witnessed an increase in activity from the world's largest hedge funds recently. AFG was in 24 hedge funds' portfolios at the end of the third quarter of 2019. There were 22 hedge funds in our database with AFG holdings at the end of the previous quarter. Our calculations also showed that AFG isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.

[caption id="attachment_758442" align="aligncenter" width="600"] Michael Platt of BlueCrest Capital Mgmt.[/caption]

Michael Platt Bluecrest Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind let's analyze the new hedge fund action encompassing American Financial Group (NYSE:AFG).

Hedge fund activity in American Financial Group (NYSE:AFG)

At the end of the third quarter, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards AFG over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of American Financial Group (NYSE:AFG), with a stake worth $85.3 million reported as of the end of September. Trailing Renaissance Technologies was AQR Capital Management, which amassed a stake valued at $85.2 million. Lomas Capital Management, Two Sigma Advisors, and Bishop Rock Capital 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 Lomas Capital Management allocated the biggest weight to American Financial Group (NYSE:AFG), around 8.46% of its 13F portfolio. Bishop Rock Capital is also relatively very bullish on the stock, earmarking 6.34 percent of its 13F equity portfolio to AFG.

Now, specific money managers were leading the bulls' herd. Voleon Capital, managed by Michael Kharitonov and Jon David McAuliffe, established the most valuable position in American Financial Group (NYSE:AFG). Voleon Capital had $3.6 million invested in the company at the end of the quarter. Michael Platt and William Reeves's BlueCrest Capital Mgmt. also initiated a $0.4 million position during the quarter. The other funds with new positions in the stock are Joel Greenblatt's Gotham Asset Management and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital.

Let's now review hedge fund activity in other stocks similar to American Financial Group (NYSE:AFG). We will take a look at Huazhu Group Limited (NASDAQ:HTHT), Viacom, Inc. (NASDAQ:VIAB), LKQ Corporation (NASDAQ:LKQ), and Allegion plc (NYSE:ALLE). All of these stocks' market caps match AFG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HTHT,16,192637,2 VIAB,37,727074,-4 LKQ,41,1409448,-4 ALLE,26,450412,2 Average,30,694893,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $695 million. That figure was $421 million in AFG's case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Huazhu Group Limited (NASDAQ:HTHT) is the least popular one with only 16 bullish hedge fund positions. American Financial Group (NYSE:AFG) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately AFG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AFG investors were disappointed as the stock returned 27.1% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

Related Content