U.S. Markets closed

How Did Prudential Financial Inc (PRU) Compare Against Top Hedge Fund Stocks in 2019?

Asma UL Husna

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57%. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 41.3% in 2019 and outperformed the broader market benchmark by 10.1 percentage points. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is Prudential Financial Inc (NYSE:PRU) undervalued? The smart money is taking a bearish view. The number of long hedge fund positions dropped by 6 lately. Our calculations also showed that PRU 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).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_256989" align="aligncenter" width="450"] Dmitry Balyasny of Balyasny Asset Managemnet[/caption]

Dmitry Balyasny of Balyasny Asset Managemnet

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. Keeping this in mind let's take a glance at the recent hedge fund action regarding Prudential Financial Inc (NYSE:PRU).

How have hedgies been trading Prudential Financial Inc (NYSE:PRU)?

Heading into the fourth quarter of 2019, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PRU over the last 17 quarters. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, Arrowstreet Capital was the largest shareholder of Prudential Financial Inc (NYSE:PRU), with a stake worth $234.3 million reported as of the end of September. Trailing Arrowstreet Capital was Two Sigma Advisors, which amassed a stake valued at $72.3 million. AQR Capital Management, Adage Capital Management, and Winton Capital 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 Gabalex Capital allocated the biggest weight to Prudential Financial Inc (NYSE:PRU), around 6.06% of its 13F portfolio. Redwood Capital Management is also relatively very bullish on the stock, designating 1.96 percent of its 13F equity portfolio to PRU.

Because Prudential Financial Inc (NYSE:PRU) has experienced a decline in interest from the aggregate hedge fund industry, it's safe to say that there exists a select few hedgies that slashed their full holdings in the third quarter. It's worth mentioning that Clint Carlson's Carlson Capital cut the largest stake of all the hedgies tracked by Insider Monkey, comprising about $21.1 million in stock. Ron Bobman's fund, Capital Returns Management, also said goodbye to its stock, about $14.3 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 6 funds in the third quarter.

Let's now take a look at hedge fund activity in other stocks similar to Prudential Financial Inc (NYSE:PRU). We will take a look at Manulife Financial Corporation (NYSE:MFC), Baidu, Inc. (NASDAQ:BIDU), The Allstate Corporation (NYSE:ALL), and V.F. Corporation (NYSE:VFC). This group of stocks' market caps match PRU's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MFC,17,354745,1 BIDU,43,1745303,-1 ALL,44,1900363,7 VFC,33,920216,1 Average,34.25,1230157,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.25 hedge funds with bullish positions and the average amount invested in these stocks was $1230 million. That figure was $577 million in PRU's case. The Allstate Corporation (NYSE:ALL) is the most popular stock in this table. On the other hand Manulife Financial Corporation (NYSE:MFC) is the least popular one with only 17 bullish hedge fund positions. Prudential Financial Inc (NYSE:PRU) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 PRU wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PRU investors were disappointed as the stock returned 20.1% 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 65 percent of these stocks already outperformed the market in 2019. 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.

Related Content