Will American Equity Investment Life Holding Company (AEL) Burn These Hedge Funds?
World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients' money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It's not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It's also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.
Hedge fund interest in American Equity Investment Life Holding Company (NYSE:AEL) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare AEL to other stocks including PolyOne Corporation (NYSE:POL), Independent Bank Group Inc (NASDAQ:IBTX), and Prospect Capital Corporation (NASDAQ:PSEC) to get a better sense of its popularity. Our calculations also showed that AEL isn't among the 30 most popular stocks among hedge funds (view the video below).
Video: Click the image to 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 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a glance at the key hedge fund action encompassing American Equity Investment Life Holding Company (NYSE:AEL).
What does smart money think about American Equity Investment Life Holding Company (NYSE:AEL)?
At Q2's end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in AEL a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in American Equity Investment Life Holding Company (NYSE:AEL) was held by Pzena Investment Management, which reported holding $31.6 million worth of stock at the end of March. It was followed by Citadel Investment Group with a $20.4 million position. Other investors bullish on the company included GLG Partners, D E Shaw, and Renaissance Technologies.
Judging by the fact that American Equity Investment Life Holding Company (NYSE:AEL) has faced declining sentiment from hedge fund managers, it's safe to say that there was a specific group of hedgies that decided to sell off their positions entirely in the second quarter. It's worth mentioning that Anand Parekh's Alyeska Investment Group sold off the biggest stake of the "upper crust" of funds watched by Insider Monkey, worth close to $4.7 million in stock. Ron Bobman's fund, Capital Returns Management, also dumped its stock, about $3.6 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to American Equity Investment Life Holding Company (NYSE:AEL). These stocks are PolyOne Corporation (NYSE:POL), Independent Bank Group Inc (NASDAQ:IBTX), Prospect Capital Corporation (NASDAQ:PSEC), and Premier Inc (NASDAQ:PINC). This group of stocks' market caps resemble AEL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position POL,24,224406,1 IBTX,9,95311,-1 PSEC,11,22786,0 PINC,16,198348,0 Average,15,135213,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $135 million. That figure was $90 million in AEL's case. PolyOne Corporation (NYSE:POL) is the most popular stock in this table. On the other hand Independent Bank Group Inc (NASDAQ:IBTX) is the least popular one with only 9 bullish hedge fund positions. American Equity Investment Life Holding Company (NYSE:AEL) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AEL wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AEL were disappointed as the stock returned -10.9% during the third quarter 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
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