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Do Hedge Funds Love China Life Insurance Company Ltd. (LFC)?

Reymerlyn Martin

Before we spend days researching a stock idea we'd like to take a look at how hedge funds and billionaire investors recently traded that stock. S&P 500 Index ETF (SPY) lost 8.7% through October 26th. Forty percent of the S&P 500 constituents were down more than 10%. The average return of a randomly picked stock in the index is -9.5%. This means you (or a monkey throwing a dart) have less than an even chance of beating the market by randomly picking a stock. On the other hand, the top 25 most popular S&P 500 stocks among hedge funds had an average loss of 8.8%. In this article, we will take a look at what hedge funds think about China Life Insurance Company Ltd. (NYSE:LFC).

Hedge fund interest in China Life Insurance Company Ltd. (NYSE:LFC) shares was flat at the end of last quarter. This is usually a negative indicator. 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 American Tower Corporation (NYSE:AMT), VMware, Inc. (NYSE:VMW), and CSX Corporation (NYSE:CSX) to gather more data points.

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 18 percentage points since May 2014 through December 3, 2018 (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.

D. E. Shaw

We're going to review the fresh hedge fund action surrounding China Life Insurance Company Ltd. (NYSE:LFC).

Hedge fund activity in China Life Insurance Company Ltd. (NYSE:LFC)

At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, no change from the second quarter of 2018. On the other hand, there were a total of 11 hedge funds with a bullish position in LFC at the beginning of this year. With the smart money's capital changing hands, there exists a few key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

LFC_dec2018

More specifically, LMR Partners was the largest shareholder of China Life Insurance Company Ltd. (NYSE:LFC), with a stake worth $14.8 million reported as of the end of September. Trailing LMR Partners was Arrowstreet Capital, which amassed a stake valued at $14.6 million. D E Shaw, Renaissance Technologies, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as China Life Insurance Company Ltd. (NYSE:LFC) has experienced declining sentiment from hedge fund managers, we can see that there were a few hedgies that elected to cut their positions entirely in the third quarter. Intriguingly, David Kowitz and Sheldon Kasowitz's Indus Capital dropped the largest investment of all the hedgies tracked by Insider Monkey, totaling close to $1.8 million in stock. Matthew Tewksbury's fund, Stevens Capital Management, also dropped its stock, about $0.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks similar to China Life Insurance Company Ltd. (NYSE:LFC). We will take a look at American Tower Corporation (NYSE:AMT), VMware, Inc. (NYSE:VMW), CSX Corporation (NYSE:CSX), and FedEx Corporation (NYSE:FDX). This group of stocks' market valuations resemble LFC's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMT,42,2904624,3 VMW,38,2366199,1 CSX,54,6677253,2 FDX,42,3460281,-1 Average,44,3852089,1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 44 hedge funds with bullish positions and the average amount invested in these stocks was $3.85 billion. That figure was $53 million in LFC's case. CSX Corporation (NYSE:CSX) is the most popular stock in this table. On the other hand VMware, Inc. (NYSE:VMW) is the least popular one with only 38 bullish hedge fund positions. Compared to these stocks China Life Insurance Company Ltd. (NYSE:LFC) is even less popular than VMW. Considering that hedge funds aren't fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn't behind this stock. This isn't necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

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

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