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American Financial Group (AFG): Hedge Funds De-risking

Debasis Saha

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards American Financial Group (NYSE:AFG).

American Financial Group (NYSE:AFG) was in 24 hedge funds' portfolios at the end of March. AFG investors should pay attention to a decrease in hedge fund sentiment recently. There were 25 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 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 tons of formulas stock market investors put to use to size up stocks. Some of the most under-the-radar formulas are hedge fund and insider trading activity. We have shown that, historically, those who follow the top picks of the top fund managers can beat the market by a significant margin (see the details here).

[caption id="attachment_30621" align="aligncenter" width="400"] Cliff Asness of AQR Capital Management[/caption]

AQR CAPITAL MANAGEMENT

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's take a look at the fresh hedge fund action regarding American Financial Group (NYSE:AFG).

How are hedge funds trading American Financial Group (NYSE:AFG)?

Heading into the second quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in AFG over the last 18 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AFG A Good Stock To Buy?

Among these funds, Lomas Capital Management held the most valuable stake in American Financial Group (NYSE:AFG), which was worth $66.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $62.4 million worth of shares. Renaissance Technologies, Millennium Management, and Two Sigma Advisors 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 6.6% of its 13F portfolio. Bishop Rock Capital is also relatively very bullish on the stock, dishing out 1.81 percent of its 13F equity portfolio to AFG.

Judging by the fact that American Financial Group (NYSE:AFG) has experienced falling interest from hedge fund managers, we can see that there were a few funds that decided to sell off their positions entirely by the end of the first quarter. Interestingly, Donald Sussman's Paloma Partners cut the largest investment of the "upper crust" of funds monitored by Insider Monkey, comprising an estimated $1.7 million in stock, and Mika Toikka's AlphaCrest Capital Management was right behind this move, as the fund cut about $0.6 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds by the end of the first quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as American Financial Group (NYSE:AFG) but similarly valued. We will take a look at Juniper Networks, Inc. (NYSE:JNPR), LKQ Corporation (NASDAQ:LKQ), Formula One Group (NASDAQ:FWONK), and Encompass Health Corporation (NYSE:EHC). This group of stocks' market values are similar to AFG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JNPR,34,540661,-3 LKQ,41,1132023,-11 FWONK,37,1125200,0 EHC,33,556709,4 Average,36.25,838648,-2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.25 hedge funds with bullish positions and the average amount invested in these stocks was $839 million. That figure was $201 million in AFG's case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Encompass Health Corporation (NYSE:EHC) is the least popular one with only 33 bullish hedge fund positions. Compared to these stocks American Financial Group (NYSE:AFG) is even less popular than EHC. Hedge funds dodged a bullet by taking a bearish stance towards AFG. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.9% in 2020 through June 10th but managed to beat the market by 14.2 percentage points. Unfortunately AFG wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); AFG investors were disappointed as the stock returned -4.4% during the second quarter (through June 10th) 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 so far in 2020.

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

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