At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Omnicom Group Inc. (NYSE:OMC) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Omnicom Group Inc. (NYSE:OMC) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 31 hedge funds' portfolios at the end of the second quarter of 2020. Our calculations also showed that OMC isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). 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 Xylem Inc (NYSE:XYL), NortonLifeLock Inc. (NASDAQ:NLOK), and Arch Capital Group Ltd. (NASDAQ:ACGL) to gather more data points. Our calculations also showed that OMC isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Phillip Gross of Adage Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now let's review the new hedge fund action encompassing Omnicom Group Inc. (NYSE:OMC).
How have hedgies been trading Omnicom Group Inc. (NYSE:OMC)?
Heading into the third quarter of 2020, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in OMC over the last 20 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of Omnicom Group Inc. (NYSE:OMC), with a stake worth $247.8 million reported as of the end of September. Trailing Citadel Investment Group was AQR Capital Management, which amassed a stake valued at $73.8 million. Renaissance Technologies, D E Shaw, and Junto Capital 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 Junto Capital Management allocated the biggest weight to Omnicom Group Inc. (NYSE:OMC), around 1.8% of its 13F portfolio. L2 Asset Management is also relatively very bullish on the stock, designating 0.99 percent of its 13F equity portfolio to OMC.
Since Omnicom Group Inc. (NYSE:OMC) has experienced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there lies a certain "tier" of money managers that decided to sell off their full holdings heading into Q3. At the top of the heap, Phill Gross and Robert Atchinson's Adage Capital Management cut the biggest stake of all the hedgies followed by Insider Monkey, worth about $13.6 million in stock, and Michael Gelband's ExodusPoint Capital was right behind this move, as the fund cut about $1.5 million worth. These moves are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks similar to Omnicom Group Inc. (NYSE:OMC). These stocks are Xylem Inc (NYSE:XYL), NortonLifeLock Inc. (NASDAQ:NLOK), Arch Capital Group Ltd. (NASDAQ:ACGL), PagSeguro Digital Ltd. (NYSE:PAGS), Expedia Group Inc (NASDAQ:EXPE), Brown & Brown, Inc. (NYSE:BRO), and Open Text Corporation (NASDAQ:OTEX). This group of stocks' market valuations match OMC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XYL,22,504853,-5 NLOK,37,1370802,-5 ACGL,36,1077194,3 PAGS,27,1013173,7 EXPE,61,3109490,20 BRO,24,633665,-2 OTEX,18,319502,0 Average,32.1,1146954,2.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 32.1 hedge funds with bullish positions and the average amount invested in these stocks was $1147 million. That figure was $588 million in OMC's case. Expedia Group Inc (NASDAQ:EXPE) is the most popular stock in this table. On the other hand Open Text Corporation (NASDAQ:OTEX) is the least popular one with only 18 bullish hedge fund positions. Omnicom Group Inc. (NYSE:OMC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for OMC is 50.1. 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 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 23.8% in 2020 through September 14th and surpassed the market by 17.6 percentage points. Unfortunately OMC wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); OMC investors were disappointed as the stock returned -1.4% since Q2 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.
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Disclosure: None. This article was originally published at Insider Monkey.