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 General Electric Company (NYSE:GE).
Is General Electric Company (NYSE:GE) ready to rally soon? Hedge funds are turning bullish. The number of long hedge fund bets inched up by 2 in recent months. Our calculations also showed that GE isn't among the 30 most popular stocks among hedge funds (see the video below). GE was in 56 hedge funds' portfolios at the end of the second quarter of 2019. There were 54 hedge funds in our database with GE positions at the end of the previous quarter. Video: Click the image to 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 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.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the recent hedge fund action encompassing General Electric Company (NYSE:GE).
How have hedgies been trading General Electric Company (NYSE:GE)?
Heading into the third quarter of 2019, a total of 56 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GE over the last 16 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Eagle Capital Management held the most valuable stake in General Electric Company (NYSE:GE), which was worth $856 million at the end of the second quarter. On the second spot was Trian Partners which amassed $674.3 million worth of shares. Moreover, Pzena Investment Management, Renaissance Technologies, and Southeastern Asset Management were also bullish on General Electric Company (NYSE:GE), allocating a large percentage of their portfolios to this stock.
As industrywide interest jumped, specific money managers have been driving this bullishness. Adage Capital Management, managed by Phill Gross and Robert Atchinson, assembled the most outsized position in General Electric Company (NYSE:GE). Adage Capital Management had $76 million invested in the company at the end of the quarter. Charles Davidson and Joseph Jacobs's Wexford Capital also initiated a $20.5 million position during the quarter. The following funds were also among the new GE investors: Dmitry Balyasny's Balyasny Asset Management, Clint Murray's Lodge Hill Capital, and Gregg Moskowitz's Interval Partners.
Let's now review hedge fund activity in other stocks similar to General Electric Company (NYSE:GE). We will take a look at Itau Unibanco Holding SA (NYSE:ITUB), Altria Group Inc (NYSE:MO), American Tower Corporation (REIT) (NYSE:AMT), and ASML Holding N.V. (NASDAQ:ASML). All of these stocks' market caps are closest to GE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ITUB,18,1084984,-3 MO,38,942106,2 AMT,42,3149112,3 ASML,12,698865,-3 Average,27.5,1468767,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $1469 million. That figure was $4500 million in GE's case. American Tower Corporation (REIT) (NYSE:AMT) is the most popular stock in this table. On the other hand ASML Holding N.V. (NASDAQ:ASML) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks General Electric Company (NYSE:GE) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately GE wasn't nearly as popular as these 20 stocks and hedge funds that were betting on GE were disappointed as the stock returned -14.8% during the third quarter and underperformed 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 many of these stocks already outperformed the market in Q3.
Disclosure: None. This article was originally published at Insider Monkey.