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Hedge Funds Dropped The Ball On Lloyds Banking Group PLC (LYG)

Reymerlyn Martin

How do we determine whether Lloyds Banking Group PLC (NYSE:LYG) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

Lloyds Banking Group PLC (NYSE:LYG) was in 7 hedge funds' portfolios at the end of the third quarter of 2019. LYG investors should pay attention to a decrease in enthusiasm from smart money of late. There were 8 hedge funds in our database with LYG positions at the end of the previous quarter. Our calculations also showed that LYG 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

Why do we pay any attention at all to hedge fund sentiment? 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_673876" align="aligncenter" width="1613"] John Overdeck of Two Sigma Advisors[/caption]

John Overdeck of Two Sigma

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind let's take a glance at the recent hedge fund action encompassing Lloyds Banking Group PLC (NYSE:LYG).

What does smart money think about Lloyds Banking Group PLC (NYSE:LYG)?

Heading into the fourth quarter of 2019, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the second quarter of 2019. By comparison, 5 hedge funds held shares or bullish call options in LYG 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.

Among these funds, Renaissance Technologies held the most valuable stake in Lloyds Banking Group PLC (NYSE:LYG), which was worth $45.5 million at the end of the third quarter. On the second spot was LMR Partners which amassed $3 million worth of shares. Citadel Investment Group, Two Sigma Advisors, 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 LMR Partners allocated the biggest weight to Lloyds Banking Group PLC (NYSE:LYG), around 0.15% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, designating 0.04 percent of its 13F equity portfolio to LYG.

Since Lloyds Banking Group PLC (NYSE:LYG) has experienced a decline in interest from hedge fund managers, logic holds that there exists a select few funds who were dropping their positions entirely heading into Q4. Interestingly, Israel Englander's Millennium Management sold off the biggest stake of the 750 funds followed by Insider Monkey, worth an estimated $0.2 million in stock. Michael Gelband's fund, ExodusPoint Capital, also said goodbye to its stock, about $0.2 million worth. These moves are important to note, as total hedge fund interest was cut by 1 funds heading into Q4.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Lloyds Banking Group PLC (NYSE:LYG) but similarly valued. These stocks are Applied Materials, Inc. (NASDAQ:AMAT), Relx PLC (NYSE:RELX), Phillips 66 (NYSE:PSX), and Honda Motor Co Ltd (NYSE:HMC). This group of stocks' market caps match LYG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMAT,50,2356178,6 RELX,6,105678,3 PSX,36,1315132,-3 HMC,10,129921,3 Average,25.5,976727,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $977 million. That figure was $52 million in LYG's case. Applied Materials, Inc. (NASDAQ:AMAT) is the most popular stock in this table. On the other hand Relx PLC (NYSE:RELX) is the least popular one with only 6 bullish hedge fund positions. Lloyds Banking Group PLC (NYSE:LYG) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on LYG as the stock returned 17.4% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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