Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards British American Tobacco plc (NYSE:BTI).
British American Tobacco plc (NYSE:BTI) shares haven't seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 9 hedge funds' portfolios at the end of December. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as CVS Caremark Corporation (NYSE:CVS), Altria Group Inc (NYSE:MO), and U.S. Bancorp (NYSE:USB) to gather more data points. Our calculations also showed that BTI isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). 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 S&P 500 ETFs by 41 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 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.
[caption id="attachment_26388" align="aligncenter" width="400"] Lee Ainslie of Maverick Capital[/caption]
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, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind we're going to take a glance at the new hedge fund action encompassing British American Tobacco plc (NYSE:BTI).
What does smart money think about British American Tobacco plc (NYSE:BTI)?
At Q4's end, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards BTI over the last 18 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
According to Insider Monkey's hedge fund database, William B. Gray's Orbis Investment Management has the biggest position in British American Tobacco plc (NYSE:BTI), worth close to $458.3 million, corresponding to 3.2% of its total 13F portfolio. The second largest stake is held by Maverick Capital, led by Lee Ainslie, holding a $103.8 million position; 1.5% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish include Ken Griffin's Citadel Investment Group, Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position Orbis Investment Management allocated the biggest weight to British American Tobacco plc (NYSE:BTI), around 3.2% of its 13F portfolio. Maverick Capital is also relatively very bullish on the stock, earmarking 1.51 percent of its 13F equity portfolio to BTI.
Because British American Tobacco plc (NYSE:BTI) has witnessed a decline in interest from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedge funds who were dropping their entire stakes last quarter. Intriguingly, Matthew Hulsizer's PEAK6 Capital Management said goodbye to the largest position of the "upper crust" of funds watched by Insider Monkey, worth close to $3 million in stock. Minhua Zhang's fund, Weld Capital Management, also dropped its stock, about $0.3 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as British American Tobacco plc (NYSE:BTI) but similarly valued. These stocks are CVS Caremark Corporation (NYSE:CVS), Altria Group Inc (NYSE:MO), U.S. Bancorp (NYSE:USB), and Lowe's Companies, Inc. (NYSE:LOW). This group of stocks' market caps resemble BTI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVS,58,969440,7 MO,54,1750020,1 USB,50,8686368,3 LOW,77,5412801,1 Average,59.75,4204657,3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 59.75 hedge funds with bullish positions and the average amount invested in these stocks was $4205 million. That figure was $607 million in BTI's case. Lowe's Companies, Inc. (NYSE:LOW) is the most popular stock in this table. On the other hand U.S. Bancorp (NYSE:USB) is the least popular one with only 50 bullish hedge fund positions. Compared to these stocks British American Tobacco plc (NYSE:BTI) is even less popular than USB. 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. These stocks lost 11.7% in 2020 through March 11th but managed to beat the market by 3.1 percentage points. A small number of hedge funds were also right about betting on BTI, though not to the same extent, as the stock returned -12.2% during the same time period and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.