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How Did Brown & Brown, Inc. (BRO) Compare Against Top Hedge Fund Stocks in 2019?

Nina Todic

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves. In this article, we look at what those funds think of Brown & Brown, Inc. (NYSE:BRO) based on that data.

Brown & Brown, Inc. (NYSE:BRO) was in 28 hedge funds' portfolios at the end of September. BRO investors should pay attention to an increase in support from the world's most elite money managers lately. There were 21 hedge funds in our database with BRO positions at the end of the previous quarter. Our calculations also showed that BRO 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).

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 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.

[caption id="attachment_26340" align="aligncenter" width="467"] Ken Griffin of Citadel Investment Group[/caption]

CITADEL INVESTMENT GROUP

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. 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. With all of this in mind let's go over the fresh hedge fund action encompassing Brown & Brown, Inc. (NYSE:BRO).

What have hedge funds been doing with Brown & Brown, Inc. (NYSE:BRO)?

At Q3's end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in BRO 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, Select Equity Group held the most valuable stake in Brown & Brown, Inc. (NYSE:BRO), which was worth $356.2 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $95.3 million worth of shares. 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 Prospector Partners allocated the biggest weight to Brown & Brown, Inc. (NYSE:BRO), around 4.1% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, setting aside 2.41 percent of its 13F equity portfolio to BRO.

As one would reasonably expect, specific money managers were leading the bulls' herd. Point72 Asset Management, managed by Steve Cohen, created the most outsized position in Brown & Brown, Inc. (NYSE:BRO). Point72 Asset Management had $9.7 million invested in the company at the end of the quarter. David Harding's Winton Capital Management also made a $5.4 million investment in the stock during the quarter. The other funds with brand new BRO positions are Donald Sussman's Paloma Partners, Matthew Tewksbury's Stevens Capital Management, and Hoon Kim's Quantinno Capital.

Let's go over hedge fund activity in other stocks similar to Brown & Brown, Inc. (NYSE:BRO). We will take a look at Tyler Technologies, Inc. (NYSE:TYL), Insulet Corporation (NASDAQ:PODD), Altaba Inc. (NASDAQ:AABA), and Eastman Chemical Company (NYSE:EMN). This group of stocks' market caps are closest to BRO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TYL,26,602875,2 PODD,37,500045,13 AABA,48,4699502,-11 EMN,27,409073,4 Average,34.5,1552874,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.5 hedge funds with bullish positions and the average amount invested in these stocks was $1553 million. That figure was $810 million in BRO's case. Altaba Inc. (NASDAQ:AABA) is the most popular stock in this table. On the other hand Tyler Technologies, Inc. (NYSE:TYL) is the least popular one with only 26 bullish hedge fund positions. Brown & Brown, Inc. (NYSE:BRO) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on BRO as the stock returned 44.7% in 2019 and outclassed the market by an even larger margin. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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