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Should I Avoid Diageo plc (DEO)?

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The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We have processed the filings of the more than 873 world-class investment firms that we track and now have access to the collective wisdom contained in these filings, which are based on their June 30th holdings, data that is available nowhere else. Should you consider Diageo plc (NYSE:DEO) for your portfolio? We'll look to this invaluable collective wisdom for the answer.

Is Diageo plc (NYSE:DEO) going to take off soon? Money managers were reducing their bets on the stock. The number of long hedge fund positions were cut by 2 recently. Diageo plc (NYSE:DEO) was in 20 hedge funds' portfolios at the end of June. The all time high for this statistic is 25. Our calculations also showed that DEO isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 22 hedge funds in our database with DEO holdings at the end of March.

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 S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

William Gray Orbis Investment Management
William Gray Orbis Investment Management

William Gray of Orbis Investment Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now let's review the latest hedge fund action surrounding Diageo plc (NYSE:DEO).

Do Hedge Funds Think DEO Is A Good Stock To Buy Now?

At second quarter's end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DEO over the last 24 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is DEO A Good Stock To Buy?
Is DEO A Good Stock To Buy?

According to Insider Monkey's hedge fund database, Markel Gayner Asset Management, managed by Tom Gayner, holds the number one position in Diageo plc (NYSE:DEO). Markel Gayner Asset Management has a $258.8 million position in the stock, comprising 3.3% of its 13F portfolio. The second largest stake is held by Ako Capital, led by Nicolai Tangen, holding a $245.8 million position; 2.8% of its 13F portfolio is allocated to the stock. Remaining professional money managers that are bullish include William B. Gray's Orbis Investment Management, Mario Gabelli's GAMCO Investors and Ken Fisher's Fisher Asset Management. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to Diageo plc (NYSE:DEO), around 3.3% of its 13F portfolio. Ako Capital is also relatively very bullish on the stock, dishing out 2.77 percent of its 13F equity portfolio to DEO.

Seeing as Diageo plc (NYSE:DEO) has experienced bearish sentiment from the entirety of the hedge funds we track, it's safe to say that there exists a select few funds who were dropping their positions entirely last quarter. At the top of the heap, Terry Smith's Fundsmith Long/Short Fund sold off the largest investment of the 750 funds followed by Insider Monkey, comprising about $3.8 million in stock. D. E. Shaw's fund, D E Shaw, also dumped its stock, about $2.9 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 2 funds last quarter.

Let's check out hedge fund activity in other stocks similar to Diageo plc (NYSE:DEO). These stocks are Square, Inc. (NYSE:SQ), Deere & Company (NYSE:DE), CVS Health Corporation (NYSE:CVS), Intuitive Surgical, Inc. (NASDAQ:ISRG), ServiceNow Inc (NYSE:NOW), Snap Inc. (NYSE:SNAP), and Lockheed Martin Corporation (NYSE:LMT). This group of stocks' market caps resemble DEO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SQ,94,10327761,2 DE,52,2173962,1 CVS,67,1355477,5 ISRG,60,3475820,7 NOW,91,7011424,-7 SNAP,64,5399955,-9 LMT,58,1565723,8 Average,69.4,4472875,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 69.4 hedge funds with bullish positions and the average amount invested in these stocks was $4473 million. That figure was $891 million in DEO's case. Square, Inc. (NYSE:SQ) is the most popular stock in this table. On the other hand Deere & Company (NYSE:DE) is the least popular one with only 52 bullish hedge fund positions. Compared to these stocks Diageo plc (NYSE:DEO) is even less popular than DE. Our overall hedge fund sentiment score for DEO is 27. 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. Hedge funds clearly dropped the ball on DEO as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and still beat the market by 1.6 percentage points. A small number of hedge funds were also right about betting on DEO as the stock returned 6.5% since Q2 (through October 22nd) and outperformed the market by an even larger margin.

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