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Is Goldman Sachs Group, Inc. (GS) Going to Burn These Hedge Funds?

Debasis Saha

Coronavirus is probably the #1 concern in investors' minds right now. It should be. We estimate that COVID-19 will kill around 5 million people worldwide and there is a 3.3% probability that Donald Trump will die from the new coronavirus (read the details). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We at Insider Monkey have gone over 835 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds' and investors' portfolio positions as of December 31st. In this article, we look at what those funds think of Goldman Sachs Group, Inc. (NYSE:GS) based on that data.

Is Goldman Sachs Group, Inc. (NYSE:GS) going to take off soon? Prominent investors are turning less bullish. The number of long hedge fund positions decreased by 3 recently. Our calculations also showed that GS isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 S&P 500 ETFs by more than 41 percentage points since March 2017 (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 stocks that are in our short portfolio.

[caption id="attachment_315178" align="alignnone" width="600"] Warren Buffett of Berkshire Hathaway[/caption]

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, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind we're going to check out the latest hedge fund action surrounding Goldman Sachs Group, Inc. (NYSE:GS).

What have hedge funds been doing with Goldman Sachs Group, Inc. (NYSE:GS)?

Heading into the first quarter of 2020, a total of 75 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. By comparison, 70 hedge funds held shares or bullish call options in GS a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Is GS A Good Stock To Buy?

The largest stake in Goldman Sachs Group, Inc. (NYSE:GS) was held by Berkshire Hathaway, which reported holding $2760.3 million worth of stock at the end of September. It was followed by Eagle Capital Management with a $1576.7 million position. Other investors bullish on the company included Greenhaven Associates, Citadel Investment Group, and Pzena Investment Management. In terms of the portfolio weights assigned to each position Greenhaven Associates allocated the biggest weight to Goldman Sachs Group, Inc. (NYSE:GS), around 16.88% of its 13F portfolio. Tegean Capital Management is also relatively very bullish on the stock, dishing out 15.22 percent of its 13F equity portfolio to GS.

Judging by the fact that Goldman Sachs Group, Inc. (NYSE:GS) has witnessed falling interest from the aggregate hedge fund industry, it's safe to say that there were a few hedge funds who sold off their positions entirely in the third quarter. Intriguingly, Ahmet Okumus's Okumus Fund Management dumped the largest stake of the "upper crust" of funds watched by Insider Monkey, totaling an estimated $68.1 million in stock, and Renaissance Technologies was right behind this move, as the fund dropped about $64.2 million worth. These transactions are interesting, as total hedge fund interest was cut by 3 funds in the third quarter.

Let's now take a look at hedge fund activity in other stocks similar to Goldman Sachs Group, Inc. (NYSE:GS). We will take a look at Enbridge Inc (NYSE:ENB), Mondelez International Inc (NASDAQ:MDLZ), Fiserv, Inc. (NASDAQ:FISV), and Stryker Corporation (NYSE:SYK). This group of stocks' market valuations match GS's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ENB,21,285809,1 MDLZ,50,2343152,-6 FISV,78,4174064,-2 SYK,43,833267,7 Average,48,1909073,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 48 hedge funds with bullish positions and the average amount invested in these stocks was $1909 million. That figure was $7581 million in GS's case. Fiserv, Inc. (NASDAQ:FISV) is the most popular stock in this table. On the other hand Enbridge Inc (NYSE:ENB) is the least popular one with only 21 bullish hedge fund positions. Goldman Sachs Group, Inc. (NYSE:GS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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. These stocks also gained 0.1% in 2020 through March 2nd and beat the market by 4.1 percentage points. Unfortunately GS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on GS were disappointed as the stock returned -8.3% during the same time period 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 so far this year.

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

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