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 Verizon Communications Inc. (NYSE:VZ) based on that data.
Verizon Communications Inc. (NYSE:VZ) was in 56 hedge funds' portfolios at the end of September. VZ investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 54 hedge funds in our database with VZ positions at the end of the previous quarter. Our calculations also showed that VZ 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).
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.
[caption id="attachment_258236" align="alignnone" width="600"] Ken Griffin of Citadel Investment Group[/caption]
We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his 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. Now let's analyze the new hedge fund action regarding Verizon Communications Inc. (NYSE:VZ).
How have hedgies been trading Verizon Communications Inc. (NYSE:VZ)?
At the end of the third quarter, a total of 56 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. On the other hand, there were a total of 51 hedge funds with a bullish position in VZ a year ago. With hedgies' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Among these funds, Citadel Investment Group held the most valuable stake in Verizon Communications Inc. (NYSE:VZ), which was worth $566.3 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $532.5 million worth of shares. Adage Capital Management, D E Shaw, and Renaissance Technologies 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 Circle Road Advisors allocated the biggest weight to Verizon Communications Inc. (NYSE:VZ), around 6.42% of its 13F portfolio. NWI Management is also relatively very bullish on the stock, designating 3.55 percent of its 13F equity portfolio to VZ.
As one would reasonably expect, specific money managers were leading the bulls' herd. Two Sigma Advisors, managed by John Overdeck and David Siegel, established the most outsized position in Verizon Communications Inc. (NYSE:VZ). Two Sigma Advisors had $23.9 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also made a $11.9 million investment in the stock during the quarter. The following funds were also among the new VZ investors: Kenneth Tropin's Graham Capital Management, Jeffrey Talpins's Element Capital Management, and Perella Weinberg Partners.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Verizon Communications Inc. (NYSE:VZ) but similarly valued. We will take a look at Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), The Walt Disney Company (NYSE:DIS), Royal Dutch Shell plc (NYSE:RDS), and The Coca-Cola Company (NYSE:KO). This group of stocks' market valuations match VZ's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TSM,52,5161771,10 DIS,105,4233957,-8 RDS,29,1386135,-5 KO,50,23639411,2 Average,59,8605319,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 59 hedge funds with bullish positions and the average amount invested in these stocks was $8605 million. That figure was $2374 million in VZ's case. The Walt Disney Company (NYSE:DIS) is the most popular stock in this table. On the other hand Royal Dutch Shell plc (NYSE:RDS) is the least popular one with only 29 bullish hedge fund positions. Verizon Communications Inc. (NYSE:VZ) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately VZ wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); VZ investors were disappointed as the stock returned 13.8% in 2019 (as of 12/23) 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.
Disclosure: None. This article was originally published at Insider Monkey.