How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Altria Group Inc (NYSE:MO) and determine whether hedge funds had an edge regarding this stock.
Altria Group Inc (NYSE:MO) has experienced a decrease in hedge fund interest in recent months. Altria Group Inc (NYSE:MO) was in 43 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 54. Our calculations also showed that MO isn't among the 30 most popular stocks among hedge funds (click for Q2 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
David Tepper of Appaloosa Management LP
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we're going to take a look at the key hedge fund action surrounding Altria Group Inc (NYSE:MO).
Hedge fund activity in Altria Group Inc (NYSE:MO)
At second quarter's end, a total of 43 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from one quarter earlier. By comparison, 38 hedge funds held shares or bullish call options in MO a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Altria Group Inc (NYSE:MO), which was worth $298.1 million at the end of the third quarter. On the second spot was Hengistbury Investment Partners which amassed $150.2 million worth of shares. Two Sigma Advisors, AQR Capital Management, and Citadel Investment Group 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 Hengistbury Investment Partners allocated the biggest weight to Altria Group Inc (NYSE:MO), around 22.7% of its 13F portfolio. Kehrs Ridge Capital is also relatively very bullish on the stock, setting aside 10.44 percent of its 13F equity portfolio to MO.
Since Altria Group Inc (NYSE:MO) has faced declining sentiment from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedgies that slashed their full holdings last quarter. Interestingly, John Armitage's Egerton Capital Limited dumped the largest investment of the "upper crust" of funds tracked by Insider Monkey, valued at close to $77.7 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund cut about $65.6 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds last quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Altria Group Inc (NYSE:MO) but similarly valued. These stocks are Zoom Video Communications, Inc. (NASDAQ:ZM), Becton, Dickinson and Company (NYSE:BDX), Rio Tinto Group (NYSE:RIO), Crown Castle International Corp. (REIT) (NYSE:CCI), Cigna Corporation (NYSE:CI), Prologis Inc (NYSE:PLD), and Caterpillar Inc. (NYSE:CAT). This group of stocks' market valuations resemble MO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ZM,48,6758811,1 BDX,53,1971353,-3 RIO,20,1324146,0 CCI,43,1988345,3 CI,72,2871074,-2 PLD,35,433481,-5 CAT,39,2667687,5 Average,44.3,2573557,-0.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 44.3 hedge funds with bullish positions and the average amount invested in these stocks was $2574 million. That figure was $1290 million in MO's case. Cigna Corporation (NYSE:CI) is the most popular stock in this table. On the other hand Rio Tinto Group (NYSE:RIO) is the least popular one with only 20 bullish hedge fund positions. Altria Group Inc (NYSE:MO) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MO is 48. 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. 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 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 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately MO wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MO investors were disappointed as the stock returned 11.4% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.