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Did Hedge Funds Drop The Ball On Legg Mason, Inc. (LM) ?

Nina Todic

As we already know from media reports and hedge fund investor letters, many hedge funds lost money in fourth quarter, blaming macroeconomic conditions and unpredictable events that hit several sectors, with technology among them. Nevertheless, most investors decided to stick to their bullish theses and recouped their losses by the end of the first quarter. We get to see hedge funds' thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Legg Mason, Inc. (NYSE:LM).

Legg Mason, Inc. (NYSE:LM) was in 17 hedge funds' portfolios at the end of March. LM investors should pay attention to a decrease in activity from the world's largest hedge funds lately. There were 18 hedge funds in our database with LM holdings at the end of the previous quarter. Our calculations also showed that lm isn't among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

Mario Gabelli with cereal box

Let's go over the latest hedge fund action surrounding Legg Mason, Inc. (NYSE:LM).

How have hedgies been trading Legg Mason, Inc. (NYSE:LM)?

At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. By comparison, 16 hedge funds held shares or bullish call options in LM a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with LM Positions

More specifically, GAMCO Investors was the largest shareholder of Legg Mason, Inc. (NYSE:LM), with a stake worth $54.1 million reported as of the end of March. Trailing GAMCO Investors was Renaissance Technologies, which amassed a stake valued at $39.2 million. Citadel Investment Group, Pzena Investment Management, and Arrowstreet Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Legg Mason, Inc. (NYSE:LM) has faced declining sentiment from hedge fund managers, it's easy to see that there were a few money managers who were dropping their entire stakes heading into Q3. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management dumped the largest investment of all the hedgies watched by Insider Monkey, comprising an estimated $7.9 million in call options, and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital was right behind this move, as the fund sold off about $1.2 million worth. These moves are important to note, as total hedge fund interest fell by 1 funds heading into Q3.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Legg Mason, Inc. (NYSE:LM) but similarly valued. We will take a look at SiteOne Landscape Supply, Inc. (NYSE:SITE), Sibanye Gold Ltd (NYSE:SBGL), Halozyme Therapeutics, Inc. (NASDAQ:HALO), and Bed Bath & Beyond Inc. (NASDAQ:BBBY). This group of stocks' market valuations match LM's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SITE,12,42960,1 SBGL,12,54954,0 HALO,18,73646,2 BBBY,29,478941,-1 Average,17.75,162625,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $163 million. That figure was $194 million in LM's case. Bed Bath & Beyond Inc. (NASDAQ:BBBY) is the most popular stock in this table. On the other hand SiteOne Landscape Supply, Inc. (NYSE:SITE) is the least popular one with only 12 bullish hedge fund positions. Legg Mason, Inc. (NYSE:LM) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on LM as the stock returned 33.1% during the same time frame and outperformed the market by an even larger margin.

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

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