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Hedge Fund Darlings vs. Lear Corporation (LEA) In 2019

Debasis Saha

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Lear Corporation (NYSE:LEA).

Is Lear Corporation (NYSE:LEA) the right pick for your portfolio? Investors who are in the know are betting on the stock. The number of long hedge fund positions increased by 2 in recent months. Our calculations also showed that LEA 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). LEA was in 33 hedge funds' portfolios at the end of the third quarter of 2019. There were 31 hedge funds in our database with LEA positions at the end of the previous quarter.

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_338852" align="alignnone" width="2480"] Richard S. Pzena of Pzena Investment Management[/caption]

Richard Pzena - Pzena Investment Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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. We even check out this option genius' weekly trade ideas. 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 already gained 20 percent. With all of this in mind we're going to go over the key hedge fund action regarding Lear Corporation (NYSE:LEA).

What have hedge funds been doing with Lear Corporation (NYSE:LEA)?

At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards LEA over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is LEA A Good Stock To Buy?

Among these funds, Pzena Investment Management held the most valuable stake in Lear Corporation (NYSE:LEA), which was worth $494.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $106.4 million worth of shares. Balyasny Asset Management, Millennium Management, and Citadel Investment Group 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 Spitfire Capital allocated the biggest weight to Lear Corporation (NYSE:LEA), around 4.77% of its 13F portfolio. Pzena Investment Management is also relatively very bullish on the stock, earmarking 2.69 percent of its 13F equity portfolio to LEA.

With a general bullishness amongst the heavyweights, some big names were leading the bulls' herd. Point72 Asset Management, managed by Steve Cohen, created the largest call position in Lear Corporation (NYSE:LEA). Point72 Asset Management had $23.6 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also initiated a $10.4 million position during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Sander Gerber's Hudson Bay Capital Management, and Benjamin A. Smith's Laurion Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Lear Corporation (NYSE:LEA) but similarly valued. These stocks are Cable One Inc (NYSE:CABO), Jones Lang LaSalle Inc (NYSE:JLL), Old Republic International Corporation (NYSE:ORI), and Hubbell Incorporated (NYSE:HUBB). This group of stocks' market caps resemble LEA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CABO,13,495048,-2 JLL,26,1081252,3 ORI,17,417709,-4 HUBB,23,383354,5 Average,19.75,594341,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $594 million. That figure was $818 million in LEA's case. Jones Lang LaSalle Inc (NYSE:JLL) is the most popular stock in this table. On the other hand Cable One Inc (NYSE:CABO) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Lear Corporation (NYSE:LEA) is more popular among hedge funds. 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 LEA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LEA were disappointed as the stock returned 17.6% so far in 2019 (through 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.

5 Most Popular Stocks Among Hedge Funds

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

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