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

Abigail Fisher

World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients' money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It's not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It's also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.

Legg Mason, Inc. (NYSE:LM) has experienced a decrease in hedge fund sentiment in recent months. LM was in 18 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 20 hedge funds in our database with LM positions at the end of the previous quarter. Our calculations also showed that LM isn't among the 30 most popular stocks among hedge funds.

According to most shareholders, hedge funds are assumed to be worthless, old financial tools of years past. While there are more than 8000 funds with their doors open today, We look at the elite of this group, about 750 funds. These investment experts manage bulk of all hedge funds' total asset base, and by tracking their inimitable equity investments, Insider Monkey has formulated numerous investment strategies that have historically surpassed the broader indices. Insider Monkey's flagship hedge fund strategy beat the S&P 500 index by nearly 5 percentage points per year since its inception in May 2014 through early November 2018. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 27.5% since February 2017 (through March 12th) even though the market was up nearly 25% during the same period. We just shared a list of 6 short targets in our latest quarterly update and they are already down an average of 6% in less than a month.

BRIDGEWATER ASSOCIATES

We're going to check out the latest hedge fund action encompassing Legg Mason, Inc. (NYSE:LM).

What have hedge funds been doing with Legg Mason, Inc. (NYSE:LM)?

At Q4's end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards LM over the last 14 quarters. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

LM_apr2019

More specifically, GAMCO Investors was the largest shareholder of Legg Mason, Inc. (NYSE:LM), with a stake worth $50.9 million reported as of the end of September. Trailing GAMCO Investors was Renaissance Technologies, which amassed a stake valued at $17.4 million. Pzena Investment Management, Fisher Asset Management, and Balyasny Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as Legg Mason, Inc. (NYSE:LM) has experienced a decline in interest from the aggregate hedge fund industry, it's safe to say that there were a few money managers that slashed their full holdings heading into Q3. It's worth mentioning that Noam Gottesman's GLG Partners dumped the biggest stake of the 700 funds watched by Insider Monkey, valued at close to $4.8 million in stock. Charles Lemonides's fund, Valueworks LLC, also said goodbye to its stock, about $2 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 2 funds heading into Q3.

Let's also examine 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 Tandem Diabetes Care Inc (NASDAQ:TNDM), Washington Federal Inc. (NASDAQ:WAFD), Eventbrite, Inc. (NYSE:EB), and Beacon Roofing Supply, Inc. (NASDAQ:BECN). This group of stocks' market caps are closest to LM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TNDM,25,373698,3 WAFD,12,76775,-1 EB,8,415314,-12 BECN,21,356118,0 Average,16.5,305476,-2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $305 million. That figure was $120 million in LM's case. Tandem Diabetes Care Inc (NASDAQ:TNDM) is the most popular stock in this table. On the other hand Eventbrite, Inc. (NYSE:EB) is the least popular one with only 8 bullish hedge fund positions. Legg Mason, Inc. (NYSE:LM) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on LM as the stock returned 30.4% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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