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Are Hedge Funds Right About Capital One Financial Corp. (COF)?

Asma UL Husna
·6 mins read

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Capital One Financial Corp. (NYSE:COF) and determine whether the smart money was really smart about this stock.

Hedge fund interest in Capital One Financial Corp. (NYSE:COF) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Canon Inc. (NYSE:CAJ), Equity Residential (NYSE:EQR), and Square, Inc. (NYSE:SQ) to gather more data points. Our calculations also showed that COF 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 58 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_339739" align="aligncenter" width="392"] Ricky Sandler of Eminence Capital[/caption]

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to analyze the latest hedge fund action surrounding Capital One Financial Corp. (NYSE:COF).

What have hedge funds been doing with Capital One Financial Corp. (NYSE:COF)?

At Q1's end, a total of 50 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 44 hedge funds held shares or bullish call options in COF a year ago. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

The largest stake in Capital One Financial Corp. (NYSE:COF) was held by Pzena Investment Management, which reported holding $284.5 million worth of stock at the end of September. It was followed by Adage Capital Management with a $119.4 million position. Other investors bullish on the company included AQR Capital Management, Antipodes Partners, and Fisher Asset Management. In terms of the portfolio weights assigned to each position Antipodes Partners allocated the biggest weight to Capital One Financial Corp. (NYSE:COF), around 4.18% of its 13F portfolio. Gillson Capital is also relatively very bullish on the stock, dishing out 3.33 percent of its 13F equity portfolio to COF.

Judging by the fact that Capital One Financial Corp. (NYSE:COF) has faced bearish sentiment from the smart money, logic holds that there lies a certain "tier" of money managers who were dropping their positions entirely heading into Q4. Intriguingly, James Parsons's Junto Capital Management sold off the largest investment of all the hedgies followed by Insider Monkey, valued at an estimated $34.7 million in stock, and Clint Carlson's Carlson Capital was right behind this move, as the fund sold off about $10.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Capital One Financial Corp. (NYSE:COF) but similarly valued. These stocks are Canon Inc. (NYSE:CAJ), Equity Residential (NYSE:EQR), Square, Inc. (NYSE:SQ), and T. Rowe Price Group, Inc. (NASDAQ:TROW). This group of stocks' market values resemble COF's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CAJ,7,46934,-1 EQR,24,175386,-6 SQ,56,1609151,0 TROW,24,191083,-3 Average,27.75,505639,-2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $506 million. That figure was $1107 million in COF's case. Square, Inc. (NYSE:SQ) is the most popular stock in this table. On the other hand Canon Inc. (NYSE:CAJ) is the least popular one with only 7 bullish hedge fund positions. Capital One Financial Corp. (NYSE:COF) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on COF, though not to the same extent, as the stock returned 25% during the second quarter and outperformed the market as well.

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

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