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 Comerica Incorporated (NYSE:CMA).
Comerica Incorporated (NYSE:CMA) shareholders have witnessed a decrease in support from the world's most elite money managers of late. Our calculations also showed that CMA isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_340081" align="aligncenter" width="450"] Phill Gross of Adage Capital Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a gander at the recent hedge fund action encompassing Comerica Incorporated (NYSE:CMA).
How have hedgies been trading Comerica Incorporated (NYSE:CMA)?
Heading into the fourth quarter of 2019, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. On the other hand, there were a total of 37 hedge funds with a bullish position in CMA a year ago. 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 holdings significantly (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Comerica Incorporated (NYSE:CMA), with a stake worth $91.3 million reported as of the end of September. Trailing AQR Capital Management was Two Sigma Advisors, which amassed a stake valued at $88.1 million. Arrowstreet Capital, Millennium 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 Third Avenue Management allocated the biggest weight to Comerica Incorporated (NYSE:CMA), around 2.26% of its portfolio. Prospector Partners is also relatively very bullish on the stock, setting aside 0.88 percent of its 13F equity portfolio to CMA.
Due to the fact that Comerica Incorporated (NYSE:CMA) has experienced declining 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 entire stakes by the end of the third quarter. It's worth mentioning that Renaissance Technologies said goodbye to the largest investment of the "upper crust" of funds followed by Insider Monkey, valued at close to $16.1 million in call options. Gregg Moskowitz's fund, Interval Partners, also dropped its call options, about $8.7 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 4 funds by the end of the third quarter.
Let's now review hedge fund activity in other stocks similar to Comerica Incorporated (NYSE:CMA). We will take a look at Teradyne, Inc. (NASDAQ:TER), Datadog, Inc. (NASDAQ:DDOG), The Western Union Company (NYSE:WU), and Autohome Inc (NYSE:ATHM). All of these stocks' market caps resemble CMA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TER,31,1128584,4 DDOG,39,208582,39 WU,20,413091,-3 ATHM,10,1157371,-6 Average,25,726907,8.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $727 million. That figure was $468 million in CMA's case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand Autohome Inc (NYSE:ATHM) is the least popular one with only 10 bullish hedge fund positions. Comerica Incorporated (NYSE:CMA) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on CMA, though not to the same extent, as the stock returned 6.7% during the first two months of the fourth quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.