In this article we will check out the progression of hedge fund sentiment towards HDFC Bank Limited (NYSE:HDB) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
HDFC Bank Limited (NYSE:HDB) shareholders have witnessed a decrease in support from the world's most elite money managers in recent months. Our calculations also showed that HDB isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
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 51 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_26262" align="aligncenter" width="359"] Steven Cohen of Point72 Asset Management[/caption]
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020's unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's review the recent hedge fund action surrounding HDFC Bank Limited (NYSE:HDB).
What have hedge funds been doing with HDFC Bank Limited (NYSE:HDB)?
At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in HDB a year ago. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
More specifically, GQG Partners was the largest shareholder of HDFC Bank Limited (NYSE:HDB), with a stake worth $848 million reported as of the end of September. Trailing GQG Partners was Fisher Asset Management, which amassed a stake valued at $261 million. Two Creeks Capital Management, Steadfast Capital Management, and Route One Investment Company 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 Two Creeks Capital Management allocated the biggest weight to HDFC Bank Limited (NYSE:HDB), around 13.55% of its 13F portfolio. Indus Capital is also relatively very bullish on the stock, dishing out 7.33 percent of its 13F equity portfolio to HDB.
Because HDFC Bank Limited (NYSE:HDB) has witnessed a decline in interest from the entirety of the hedge funds we track, we can see that there were a few hedge funds that decided to sell off their positions entirely last quarter. Interestingly, John Armitage's Egerton Capital Limited dumped the largest position of the "upper crust" of funds tracked by Insider Monkey, totaling about $273.3 million in stock. Robert Pohly's fund, Samlyn Capital, also cut its stock, about $164.7 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 1 funds last quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as HDFC Bank Limited (NYSE:HDB) but similarly valued. These stocks are General Electric Company (NYSE:GE), American Express Company (NYSE:AXP), BlackRock, Inc. (NYSE:BLK), and Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF). This group of stocks' market valuations resemble HDB's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GE,58,3531845,-2 AXP,57,15414059,-1 BLK,38,678087,-5 KOF,7,325265,-3 Average,40,4987314,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 40 hedge funds with bullish positions and the average amount invested in these stocks was $4987 million. That figure was $1853 million in HDB's case. General Electric Company (NYSE:GE) is the most popular stock in this table. On the other hand Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) is the least popular one with only 7 bullish hedge fund positions. HDFC Bank Limited (NYSE:HDB) is not the least popular stock in this group but hedge fund interest is still below average. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 8.3% in 2020 through the end of May and surpassed the market by 13.2 percentage points. Unfortunately HDB wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HDB investors were disappointed as the stock returned 8.8% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
Disclosure: None. This article was originally published at Insider Monkey.