There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don't cover. Because of Carl Icahn and other elite funds' exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze Lear Corporation (NYSE:LEA).
Lear Corporation (NYSE:LEA) was in 31 hedge funds' portfolios at the end of the second quarter of 2019. LEA has seen a decrease in activity from the world's largest hedge funds recently. There were 40 hedge funds in our database with LEA positions at the end of the previous quarter. Our calculations also showed that LEA isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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.
Unlike this former hedge fund manager who is convinced Dow will soar past 40000, 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 gander at the recent hedge fund action surrounding Lear Corporation (NYSE:LEA).
What have hedge funds been doing with Lear Corporation (NYSE:LEA)?
At Q2's end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the previous quarter. The graph below displays the number of hedge funds with bullish position in LEA over the last 16 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Richard S. Pzena's Pzena Investment Management has the biggest position in Lear Corporation (NYSE:LEA), worth close to $534 million, amounting to 2.8% of its total 13F portfolio. On Pzena Investment Management's heels is AQR Capital Management, managed by Cliff Asness, which holds a $103.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism consist of Robert Bishop's Impala Asset Management, Phill Gross and Robert Atchinson's Adage Capital Management and John Overdeck and David Siegel's Two Sigma Advisors.
Due to the fact that Lear Corporation (NYSE:LEA) has faced falling interest from the smart money, logic holds that there lies a certain "tier" of hedgies that slashed their entire stakes last quarter. At the top of the heap, Eric F. Billings's Billings Capital Management cut the biggest investment of the "upper crust" of funds watched by Insider Monkey, comprising an estimated $11.5 million in stock, and Alexander Mitchell's Scopus Asset Management was right behind this move, as the fund dumped about $7.5 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 9 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Lear Corporation (NYSE:LEA) but similarly valued. These stocks are National Oilwell Varco, Inc. (NYSE:NOV), Levi Strauss & Co. (NYSE:LEVI), Athene Holding Ltd. (NYSE:ATH), and LKQ Corporation (NASDAQ:LKQ). All of these stocks' market caps resemble LEA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NOV,22,755334,4 LEVI,15,74009,-10 ATH,39,1352955,4 LKQ,45,955700,2 Average,30.25,784500,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 30.25 hedge funds with bullish positions and the average amount invested in these stocks was $784 million. That figure was $844 million in LEA's case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Levi Strauss & Co. (NYSE:LEVI) is the least popular one with only 15 bullish hedge fund positions. Lear Corporation (NYSE:LEA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately LEA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LEA were disappointed as the stock returned -14.7% during the third 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.