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Did Hedge Funds Make The Right Call On Jefferies Financial Group Inc. (JEF) ?

Debasis Saha
·6 min read

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 Jefferies Financial Group Inc. (NYSE:JEF) and determine whether hedge funds had an edge regarding this stock.

Jefferies Financial Group Inc. (NYSE:JEF) has experienced a decrease in hedge fund interest of late. JEF was in 30 hedge funds' portfolios at the end of March. There were 31 hedge funds in our database with JEF holdings at the end of the previous quarter. Our calculations also showed that JEF isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 58 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. 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.

BRIDGEWATER ASSOCIATES
BRIDGEWATER ASSOCIATES

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we're going to view the fresh hedge fund action regarding Jefferies Financial Group Inc. (NYSE:JEF).

How have hedgies been trading Jefferies Financial Group Inc. (NYSE:JEF)?

At Q1's end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in JEF over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is JEF A Good Stock To Buy?
Is JEF A Good Stock To Buy?

Of the funds tracked by Insider Monkey, First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, holds the biggest position in Jefferies Financial Group Inc. (NYSE:JEF). First Pacific Advisors LLC has a $259.6 million position in the stock, comprising 3.7% of its 13F portfolio. Sitting at the No. 2 spot is Arlington Value Capital, led by Allan Mecham, holding a $41.8 million position; 6.1% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions consist of Amit Wadhwaney's Moerus Capital Management, Gregg J. Powers's Private Capital Management and Steve Leonard's Pacifica Capital Investments. In terms of the portfolio weights assigned to each position Moerus Capital Management allocated the biggest weight to Jefferies Financial Group Inc. (NYSE:JEF), around 14.55% of its 13F portfolio. Pacifica Capital Investments is also relatively very bullish on the stock, setting aside 7.27 percent of its 13F equity portfolio to JEF.

Seeing as Jefferies Financial Group Inc. (NYSE:JEF) has experienced a decline in interest from hedge fund managers, it's easy to see that there was a specific group of money managers that decided to sell off their positions entirely by the end of the first quarter. It's worth mentioning that Daniel Beltzman and Gergory Smith's Birch Run Capital said goodbye to the biggest stake of the "upper crust" of funds watched by Insider Monkey, totaling an estimated $4.7 million in stock. Ray Dalio's fund, Bridgewater Associates, also dumped its stock, about $1.3 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds by the end of the first quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Jefferies Financial Group Inc. (NYSE:JEF) but similarly valued. We will take a look at Highwoods Properties Inc (NYSE:HIW), Grand Canyon Education Inc (NASDAQ:LOPE), ServiceMaster Global Holdings Inc (NYSE:SERV), and J2 Global Inc (NASDAQ:JCOM). All of these stocks' market caps match JEF's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HIW,15,101293,-1 LOPE,28,185626,8 SERV,31,593890,-11 JCOM,21,219272,-2 Average,23.75,275020,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $275 million. That figure was $402 million in JEF's case. ServiceMaster Global Holdings Inc (NYSE:SERV) is the most popular stock in this table. On the other hand Highwoods Properties Inc (NYSE:HIW) is the least popular one with only 15 bullish hedge fund positions. Jefferies Financial Group Inc. (NYSE:JEF) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately JEF wasn't nearly as popular as these 10 stocks and hedge funds that were betting on JEF were disappointed as the stock returned 15.1% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Get real-time email alerts: Follow Jefferies Financial Group Inc. (NYSE:JEF)

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

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