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Hedge Funds Aren’t Crazy About Huntington Ingalls Industries Inc (HII) Anymore

·6 min read

Is Huntington Ingalls Industries Inc (NYSE:HII) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Huntington Ingalls Industries Inc (NYSE:HII) has experienced a decrease in enthusiasm from smart money recently. Huntington Ingalls Industries Inc (NYSE:HII) was in 20 hedge funds' portfolios at the end of March. The all time high for this statistic is 32. Our calculations also showed that HII isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 S&P 500 ETFs by 115 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.

BRIDGEWATER ASSOCIATES
BRIDGEWATER ASSOCIATES

Ray Dalio of Bridgewater Associates

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we're going to take a gander at the new hedge fund action encompassing Huntington Ingalls Industries Inc (NYSE:HII).

Do Hedge Funds Think HII Is A Good Stock To Buy Now?

Heading into the second quarter of 2021, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the fourth quarter of 2020. On the other hand, there were a total of 21 hedge funds with a bullish position in HII a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

More specifically, AQR Capital Management was the largest shareholder of Huntington Ingalls Industries Inc (NYSE:HII), with a stake worth $125.8 million reported as of the end of March. Trailing AQR Capital Management was Alyeska Investment Group, which amassed a stake valued at $43.7 million. Renaissance Technologies, D E Shaw, and Arrowstreet Capital 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 Factorial Partners allocated the biggest weight to Huntington Ingalls Industries Inc (NYSE:HII), around 0.68% of its 13F portfolio. Alyeska Investment Group is also relatively very bullish on the stock, setting aside 0.58 percent of its 13F equity portfolio to HII.

Because Huntington Ingalls Industries Inc (NYSE:HII) has experienced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there were a few funds that decided to sell off their entire stakes last quarter. Interestingly, Noah Levy and Eugene Dozortsev's Newtyn Management cut the largest investment of all the hedgies monitored by Insider Monkey, comprising close to $21.3 million in stock. Matthew Hulsizer's fund, PEAK6 Capital Management, also said goodbye to its stock, about $2.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 1 funds last quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Huntington Ingalls Industries Inc (NYSE:HII) but similarly valued. These stocks are Santander Consumer USA Holdings Inc (NYSE:SC), Arrow Electronics, Inc. (NYSE:ARW), Lightspeed POS Inc. (NYSE:LSPD), Berry Global Group Inc (NYSE:BERY), Globant SA (NYSE:GLOB), Acceleron Pharma Inc (NASDAQ:XLRN), and Beyond Meat, Inc. (NASDAQ:BYND). This group of stocks' market valuations resemble HII's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SC,23,309023,2 ARW,23,767932,-4 LSPD,21,643714,1 BERY,42,1404006,8 GLOB,17,323406,2 XLRN,31,1647100,-3 BYND,26,338693,-1 Average,26.1,776268,0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.1 hedge funds with bullish positions and the average amount invested in these stocks was $776 million. That figure was $278 million in HII's case. Berry Global Group Inc (NYSE:BERY) is the most popular stock in this table. On the other hand Globant SA (NYSE:GLOB) is the least popular one with only 17 bullish hedge fund positions. Huntington Ingalls Industries Inc (NYSE:HII) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HII is 28.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 23.8% in 2021 through July 16th and surpassed the market again by 7.7 percentage points. Unfortunately HII wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); HII investors were disappointed as the stock returned -2% since the end of March (through 7/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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