It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Genuine Parts Company (NYSE:GPC).
Genuine Parts Company (NYSE:GPC) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 20 hedge funds' portfolios at the end of September. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Franklin Resources, Inc. (NYSE:BEN), Darden Restaurants, Inc. (NYSE:DRI), and Dover Corporation (NYSE:DOV) to gather more data points. Our calculations also showed that GPC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' 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_673876" align="aligncenter" width="473"] John Overdeck of Two Sigma Advisors[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's check out the new hedge fund action encompassing Genuine Parts Company (NYSE:GPC).
What does smart money think about Genuine Parts Company (NYSE:GPC)?
At Q3's end, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2019. On the other hand, there were a total of 21 hedge funds with a bullish position in GPC a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, GAMCO Investors was the largest shareholder of Genuine Parts Company (NYSE:GPC), with a stake worth $117.1 million reported as of the end of September. Trailing GAMCO Investors was GLG Partners, which amassed a stake valued at $17.5 million. Two Sigma Advisors, D E Shaw, and Adage 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 GAMCO Investors allocated the biggest weight to Genuine Parts Company (NYSE:GPC), around 0.98% of its 13F portfolio. GLG Partners is also relatively very bullish on the stock, dishing out 0.07 percent of its 13F equity portfolio to GPC.
Since Genuine Parts Company (NYSE:GPC) has witnessed falling interest from the entirety of the hedge funds we track, it's easy to see that there lies a certain "tier" of hedgies who were dropping their positions entirely in the third quarter. It's worth mentioning that Renaissance Technologies dumped the biggest position of the "upper crust" of funds watched by Insider Monkey, valued at about $29.7 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also dumped its stock, about $8.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Genuine Parts Company (NYSE:GPC) but similarly valued. These stocks are Franklin Resources, Inc. (NYSE:BEN), Darden Restaurants, Inc. (NYSE:DRI), Dover Corporation (NYSE:DOV), and Align Technology, Inc. (NASDAQ:ALGN). This group of stocks' market valuations are closest to GPC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BEN,35,604294,10 DRI,28,812020,4 DOV,30,731406,-2 ALGN,34,1496709,-7 Average,31.75,911107,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.75 hedge funds with bullish positions and the average amount invested in these stocks was $911 million. That figure was $186 million in GPC's case. Franklin Resources, Inc. (NYSE:BEN) is the most popular stock in this table. On the other hand Darden Restaurants, Inc. (NYSE:DRI) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Genuine Parts Company (NYSE:GPC) is even less popular than DRI. Hedge funds dodged a bullet by taking a bearish stance towards GPC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately GPC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); GPC investors were disappointed as the stock returned 4.8% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.