We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let's see whether TCF Financial Corporation (NYSE:TCF) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Is TCF Financial Corporation (NYSE:TCF) a healthy stock for your portfolio? Hedge funds are selling. The number of bullish hedge fund bets fell by 7 in recent months. Our calculations also showed that TCF isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). TCF was in 24 hedge funds' portfolios at the end of December. There were 31 hedge funds in our database with TCF holdings at the end of the previous quarter.
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' 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 41 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.
[caption id="attachment_338852" align="aligncenter" width="400"] Richard S. Pzena of Pzena Investment Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when 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 take a gander at the latest hedge fund action surrounding TCF Financial Corporation (NYSE:TCF).
How have hedgies been trading TCF Financial Corporation (NASDAQ:TCF)?
Heading into the first quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from the third quarter of 2019. On the other hand, there were a total of 23 hedge funds with a bullish position in TCF a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in TCF Financial Corporation (NASDAQ:TCF) was held by Pzena Investment Management, which reported holding $35.8 million worth of stock at the end of September. It was followed by Millennium Management with a $31.1 million position. Other investors bullish on the company included Holocene Advisors, Castine Capital Management, and Adage Capital Management. In terms of the portfolio weights assigned to each position Strycker View Capital allocated the biggest weight to TCF Financial Corporation (NASDAQ:TCF), around 7.28% of its 13F portfolio. Castine Capital Management is also relatively very bullish on the stock, setting aside 6.57 percent of its 13F equity portfolio to TCF.
Judging by the fact that TCF Financial Corporation (NASDAQ:TCF) has experienced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there is a sect of fund managers who were dropping their positions entirely by the end of the third quarter. Interestingly, Ken Griffin's Citadel Investment Group cut the largest investment of all the hedgies tracked by Insider Monkey, totaling close to $74.9 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also dumped its stock, about $35.6 million worth. These moves are interesting, as total hedge fund interest dropped by 7 funds by the end of the third quarter.
Let's now review hedge fund activity in other stocks similar to TCF Financial Corporation (NASDAQ:TCF). These stocks are Axalta Coating Systems Ltd (NYSE:AXTA), Five Below Inc (NASDAQ:FIVE), Cabot Oil & Gas Corporation (NYSE:COG), and Dynatrace, Inc. (NYSE:DT). This group of stocks' market valuations resemble TCF's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AXTA,60,1990462,0 FIVE,42,614848,5 COG,34,460767,-6 DT,25,614519,5 Average,40.25,920149,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 40.25 hedge funds with bullish positions and the average amount invested in these stocks was $920 million. That figure was $238 million in TCF's case. Axalta Coating Systems Ltd (NYSE:AXTA) is the most popular stock in this table. On the other hand Dynatrace, Inc. (NYSE:DT) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks TCF Financial Corporation (NASDAQ:TCF) is even less popular than DT. Hedge funds dodged a bullet by taking a bearish stance towards TCF. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. Unfortunately TCF wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); TCF investors were disappointed as the stock returned -51.9% during the same time period 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 most of these stocks already outperformed the market so far in Q1. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.