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Hedge Fund Darlings vs. Northrop Grumman Corporation (NOC) In 2019

Debasis Saha

Last year's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards Northrop Grumman Corporation (NYSE:NOC) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.

Is Northrop Grumman Corporation (NYSE:NOC) the right investment to pursue these days? The best stock pickers are betting on the stock. The number of long hedge fund bets moved up by 6 recently. Our calculations also showed that NOC 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).

Why do we pay any attention at all to hedge fund sentiment? 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_30621" align="alignnone" width="600"] Cliff Asness of AQR Capital Management[/caption]

AQR CAPITAL 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. Now we're going to analyze the key hedge fund action surrounding Northrop Grumman Corporation (NYSE:NOC).

How have hedgies been trading Northrop Grumman Corporation (NYSE:NOC)?

Heading into the fourth quarter of 2019, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in NOC over the last 17 quarters. With hedge funds' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Is NOC A Good Stock To Buy?

Among these funds, AQR Capital Management held the most valuable stake in Northrop Grumman Corporation (NYSE:NOC), which was worth $166.4 million at the end of the third quarter. On the second spot was Alkeon Capital Management which amassed $151.5 million worth of shares. Suvretta Capital Management, Millennium Management, and Scopus Asset 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 Capital Growth Management allocated the biggest weight to Northrop Grumman Corporation (NYSE:NOC), around 3.33% of its 13F portfolio. Suvretta Capital Management is also relatively very bullish on the stock, earmarking 2.91 percent of its 13F equity portfolio to NOC.

Now, key money managers were breaking ground themselves. Paloma Partners, managed by Donald Sussman, assembled the most outsized position in Northrop Grumman Corporation (NYSE:NOC). Paloma Partners had $43 million invested in the company at the end of the quarter. Ken Griffin's Citadel Investment Group also initiated a $26.1 million position during the quarter. The other funds with brand new NOC positions are Michael Kharitonov and Jon David McAuliffe's Voleon Capital, Michael Gelband's ExodusPoint Capital, and Bruce Kovner's Caxton Associates.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Northrop Grumman Corporation (NYSE:NOC) but similarly valued. These stocks are ConocoPhillips (NYSE:COP), Colgate-Palmolive Company (NYSE:CL), Equinor ASA (NYSE:EQNR), and Enterprise Products Partners L.P. (NYSE:EPD). This group of stocks' market caps match NOC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COP,65,2901952,8 CL,42,2061209,0 EQNR,14,392283,1 EPD,21,301985,2 Average,35.5,1414357,2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.5 hedge funds with bullish positions and the average amount invested in these stocks was $1414 million. That figure was $843 million in NOC's case. ConocoPhillips (NYSE:COP) is the most popular stock in this table. On the other hand Equinor ASA (NYSE:EQNR) is the least popular one with only 14 bullish hedge fund positions. Northrop Grumman Corporation (NYSE:NOC) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on NOC as the stock returned 44.4% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness. 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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