Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Arthur J. Gallagher & Co. (NYSE:AJG).
Arthur J. Gallagher & Co. (NYSE:AJG) was in 25 hedge funds' portfolios at the end of the second quarter of 2019. AJG investors should pay attention to a decrease in activity from the world's largest hedge funds of late. There were 28 hedge funds in our database with AJG holdings at the end of the previous quarter. Our calculations also showed that AJG isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the new hedge fund action surrounding Arthur J. Gallagher & Co. (NYSE:AJG).
Hedge fund activity in Arthur J. Gallagher & Co. (NYSE:AJG)
At the end of the second quarter, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in AJG a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
[caption id="attachment_758454" align="aligncenter" width="450"] James Dondero of Highland Capital Management[/caption]
The largest stake in Arthur J. Gallagher & Co. (NYSE:AJG) was held by Balyasny Asset Management, which reported holding $84.3 million worth of stock at the end of March. It was followed by Adage Capital Management with a $55.5 million position. Other investors bullish on the company included Citadel Investment Group, Renaissance Technologies, and Point72 Asset Management.
Since Arthur J. Gallagher & Co. (NYSE:AJG) has witnessed a decline in interest from the entirety of the hedge funds we track, it's easy to see that there were a few funds who were dropping their full holdings heading into Q3. At the top of the heap, Andreas Halvorsen's Viking Global dumped the biggest investment of the 750 funds watched by Insider Monkey, valued at close to $37.2 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund dropped about $4.2 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 3 funds heading into Q3.
Let's now review hedge fund activity in other stocks similar to Arthur J. Gallagher & Co. (NYSE:AJG). We will take a look at Altice USA, Inc. (NYSE:ATUS), Freeport-McMoRan Inc. (NYSE:FCX), CMS Energy Corporation (NYSE:CMS), and Nasdaq, Inc. (NASDAQ:NDAQ). This group of stocks' market caps resemble AJG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATUS,45,2879579,-7 FCX,33,1184030,-9 CMS,22,666320,0 NDAQ,20,115423,4 Average,30,1211338,-3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $1211 million. That figure was $318 million in AJG's case. Altice USA, Inc. (NYSE:ATUS) is the most popular stock in this table. On the other hand Nasdaq, Inc. (NASDAQ:NDAQ) is the least popular one with only 20 bullish hedge fund positions. Arthur J. Gallagher & Co. (NYSE:AJG) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on AJG, though not to the same extent, as the stock returned 2.8% during the third quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.