While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding AFLAC Incorporated (NYSE:AFL) and see how the stock performed in comparison to hedge funds' consensus picks.
Is AFLAC Incorporated (NYSE:AFL) undervalued? Prominent investors are in an optimistic mood. The number of long hedge fund positions moved up by 4 in recent months. Our calculations also showed that AFL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_256989" align="aligncenter" width="450"] Dmitry Balyasny of Balyasny Asset Managemnet[/caption]
We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind we're going to take a look at the new hedge fund action surrounding AFLAC Incorporated (NYSE:AFL).
Hedge fund activity in AFLAC Incorporated (NYSE:AFL)
At Q3's end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the previous quarter. By comparison, 29 hedge funds held shares or bullish call options in AFL a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, AQR Capital Management held the most valuable stake in AFLAC Incorporated (NYSE:AFL), which was worth $286.5 million at the end of the third quarter. On the second spot was Ariel Investments which amassed $84.6 million worth of shares. Adage Capital Management, Balyasny Asset Management, and Polar Capital 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 Prospector Partners allocated the biggest weight to AFLAC Incorporated (NYSE:AFL), around 1.98% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, dishing out 1.13 percent of its 13F equity portfolio to AFL.
As industrywide interest jumped, key money managers have jumped into AFLAC Incorporated (NYSE:AFL) headfirst. Winton Capital Management, managed by David Harding, established the biggest position in AFLAC Incorporated (NYSE:AFL). Winton Capital Management had $9 million invested in the company at the end of the quarter. Peter Seuss's Prana Capital Management also initiated a $5.9 million position during the quarter. The following funds were also among the new AFL investors: Donald Sussman's Paloma Partners, Brandon Haley's Holocene Advisors, and Benjamin A. Smith's Laurion Capital Management.
Let's check out hedge fund activity in other stocks similar to AFLAC Incorporated (NYSE:AFL). We will take a look at The Travelers Companies, Inc. (NYSE:TRV), Ferrari N.V. (NYSE:RACE), Keurig Dr Pepper Inc. (NYSE:KDP), and FedEx Corporation (NYSE:FDX). All of these stocks' market caps are closest to AFL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRV,34,1514479,8 RACE,32,1530799,2 KDP,20,669516,-1 FDX,40,1369398,0 Average,31.5,1271048,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $1271 million. That figure was $528 million in AFL's case. FedEx Corporation (NYSE:FDX) is the most popular stock in this table. On the other hand Keurig Dr Pepper Inc. (NYSE:KDP) is the least popular one with only 20 bullish hedge fund positions. AFLAC Incorporated (NYSE:AFL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately AFL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AFL investors were disappointed as the stock returned 17.7% in 2019 (as of 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.