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Do Hedge Funds Love AFLAC Incorporated (AFL)?

Abigail Fisher

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like AFLAC Incorporated (NYSE:AFL).

AFLAC Incorporated (NYSE:AFL) shareholders have witnessed an increase in hedge fund sentiment recently. Our calculations also showed that AFL 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

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 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 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_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/caption]

AQR CAPITAL MANAGEMENT

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to review the new hedge fund action surrounding AFLAC Incorporated (NYSE:AFL).

How have hedgies been trading AFLAC Incorporated (NYSE:AFL)?

At Q3's end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards AFL over the last 17 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

AFL_dec2019

More specifically, AQR Capital Management was the largest shareholder of AFLAC Incorporated (NYSE:AFL), with a stake worth $286.5 million reported as of the end of September. Trailing AQR Capital Management was Ariel Investments, which amassed a stake valued at $84.6 million. Adage Capital Management, Balyasny Asset Management, and Polar 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 Prospector Partners allocated the biggest weight to AFLAC Incorporated (NYSE:AFL), around 1.98% of its portfolio. Ariel Investments is also relatively very bullish on the stock, earmarking 1.13 percent of its 13F equity portfolio to AFL.

As one would reasonably expect, key money managers have been driving this bullishness. Winton Capital Management, managed by David Harding, established the biggest position in AFLAC Incorporated (NYSE:AFL). Winton Capital Management had $9 million invested in the company at the end of the quarter. Peter Seuss's Prana Capital Management also made a $5.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Donald Sussman's Paloma Partners, Brandon Haley's Holocene Advisors, and Benjamin A. Smith's Laurion Capital Management.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as AFLAC Incorporated (NYSE:AFL) but similarly valued. We will take a look at The Travelers Companies Inc (NYSE:TRV), Ferrari N.V. (NYSE:RACE), Keurig Dr Pepper Inc. (NYSE:KDP), and FedEx Corporation (NYSE:FDX). All of these stocks' market caps resemble AFL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRV,34,1514479,8 RACE,32,1530799,2 KDP,20,669516,-1 FDX,40,1369398,0 Average,31.5,1271048,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $1271 million. That figure was $528 million in AFL's case. FedEx Corporation (NYSE:FDX) is the most popular stock in this table. On the other hand Keurig Dr Pepper Inc. (NYSE:KDP) is the least popular one with only 20 bullish hedge fund positions. AFLAC Incorporated (NYSE:AFL) is not the least popular stock in this group but hedge fund interest is still below average. 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 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. Unfortunately AFL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AFL investors were disappointed as the stock returned 5.3% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.

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

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