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How Did The Hanover Insurance Group, Inc. (THG) Compare Against Top Hedge Fund Stocks in 2019?

Debasis Saha

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 The Hanover Insurance Group, Inc. (NYSE:THG) based on that data.

Is The Hanover Insurance Group, Inc. (NYSE:THG) a first-rate investment today? The smart money is in an optimistic mood. The number of long hedge fund bets increased by 5 lately. Our calculations also showed that THG 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). THG was in 25 hedge funds' portfolios at the end of the third quarter of 2019. There were 20 hedge funds in our database with THG holdings at the end of the previous quarter.

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_30621" align="alignnone" width="600"] Cliff Asness of AQR Capital Management[/caption]

AQR CAPITAL MANAGEMENT

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 we're going to view the fresh hedge fund action surrounding The Hanover Insurance Group, Inc. (NYSE:THG).

Hedge fund activity in The Hanover Insurance Group, Inc. (NYSE:THG)

Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from the previous quarter. The graph below displays the number of hedge funds with bullish position in THG over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is THG A Good Stock To Buy?

Among these funds, AQR Capital Management held the most valuable stake in The Hanover Insurance Group, Inc. (NYSE:THG), which was worth $56.5 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $33.3 million worth of shares. Millennium Management, Two Sigma Advisors, and Pzena Investment Management 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 The Hanover Insurance Group, Inc. (NYSE:THG), around 2.44% of its 13F portfolio. Gillson Capital is also relatively very bullish on the stock, designating 1.99 percent of its 13F equity portfolio to THG.

With a general bullishness amongst the heavyweights, specific money managers have jumped into The Hanover Insurance Group, Inc. (NYSE:THG) headfirst. Laurion Capital Management, managed by Benjamin A. Smith, established the largest position in The Hanover Insurance Group, Inc. (NYSE:THG). Laurion Capital Management had $1.5 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also made a $0.9 million investment in the stock during the quarter. The other funds with brand new THG positions are Bruce Kovner's Caxton Associates, Michael Platt and William Reeves's BlueCrest Capital Mgmt., and Paul Marshall and Ian Wace's Marshall Wace.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as The Hanover Insurance Group, Inc. (NYSE:THG) but similarly valued. These stocks are Exelixis, Inc. (NASDAQ:EXEL), Planet Fitness Inc (NYSE:PLNT), Gerdau SA (NYSE:GGB), and Huntsman Corporation (NYSE:HUN). This group of stocks' market caps are similar to THG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EXEL,27,681846,6 PLNT,34,525492,-4 GGB,9,95401,2 HUN,28,394601,-2 Average,24.5,424335,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $424 million. That figure was $272 million in THG's case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand Gerdau SA (NYSE:GGB) is the least popular one with only 9 bullish hedge fund positions. The Hanover Insurance Group, Inc. (NYSE:THG) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately THG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on THG were disappointed as the stock returned 26.7% in 2019 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 many of these stocks already outperformed the market so far this year. 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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