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Hedge Funds Are Betting On Diageo plc (DEO)

Nina Todic

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Diageo plc (NYSE:DEO).

Diageo plc (NYSE:DEO) shareholders have witnessed an increase in hedge fund sentiment in recent months. DEO was in 22 hedge funds' portfolios at the end of September. There were 15 hedge funds in our database with DEO holdings at the end of the previous quarter. Our calculations also showed that DEO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 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

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' 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_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/caption]

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's review the fresh hedge fund action encompassing Diageo plc (NYSE:DEO).

What does smart money think about Diageo plc (NYSE:DEO)?

Heading into the fourth quarter of 2019, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 47% from one quarter earlier. By comparison, 15 hedge funds held shares or bullish call options in DEO a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Gardner Russo & Gardner was the largest shareholder of Diageo plc (NYSE:DEO), with a stake worth $228.8 million reported as of the end of September. Trailing Gardner Russo & Gardner was Markel Gayner Asset Management, which amassed a stake valued at $220.7 million. Arrowstreet Capital, GAMCO Investors, and Renaissance Technologies 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 Markel Gayner Asset Management allocated the biggest weight to Diageo plc (NYSE:DEO), around 3.33% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, designating 2.09 percent of its 13F equity portfolio to DEO.

With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Lakewood Capital Management, managed by Anthony Bozza, assembled the most outsized position in Diageo plc (NYSE:DEO). Lakewood Capital Management had $16.3 million invested in the company at the end of the quarter. Matthew Hulsizer's PEAK6 Capital Management also made a $4.2 million investment in the stock during the quarter. The following funds were also among the new DEO investors: Israel Englander's Millennium Management, Donald Sussman's Paloma Partners, and Michael Gelband's ExodusPoint Capital.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Diageo plc (NYSE:DEO) but similarly valued. We will take a look at 3M Company (NYSE:MMM), Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR), PetroChina Company Limited (NYSE:PTR), and QUALCOMM, Incorporated (NASDAQ:QCOM). This group of stocks' market values match DEO's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MMM,45,825815,5 PBR,30,2022999,-2 PTR,11,106487,2 QCOM,55,1817218,-6 Average,35.25,1193130,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $1193 million. That figure was $930 million in DEO's case. QUALCOMM, Incorporated (NASDAQ:QCOM) is the most popular stock in this table. On the other hand PetroChina Company Limited (NYSE:PTR) is the least popular one with only 11 bullish hedge fund positions. Diageo plc (NYSE:DEO) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately DEO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DEO investors were disappointed as the stock returned 0% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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