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Hedge Funds Love Legg Mason, Inc. (LM) More Than These 3 Stocks

Nina Todic

The Insider Monkey team has completed processing the quarterly 13F filings for the September quarter submitted by the hedge funds and other money managers included in our extensive database. Most hedge fund investors experienced strong gains on the back of a strong market performance, which certainly propelled them to adjust their equity holdings so as to maintain the desired risk profile. As a result, the relevancy of these public filings and their content is indisputable, as they may reveal numerous high-potential stocks. The following article will discuss the smart money sentiment towards Legg Mason, Inc. (NYSE:LM) and compare it against similarly valued peers such as  The Timken Company (NYSE:TKR), Cedar Fair, L.P. (NYSE:FUN), ICU Medical, Inc. (NASDAQ:ICUI), and NuVasive, Inc. (NASDAQ:NUVA).

Legg Mason, Inc. (NYSE:LM) has experienced an increase in hedge fund interest recently. LM was in 25 hedge funds' portfolios at the end of September. There were 18 hedge funds in our database with LM positions at the end of the previous quarter. Our calculations also showed that LM 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

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_30574" align="aligncenter" width="509"] Nelson Peltz of Trian Partners[/caption]

TRIAN PARTNERS

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 take a look at the new hedge fund action surrounding Legg Mason, Inc. (NYSE:LM).

How have hedgies been trading Legg Mason, Inc. (NYSE:LM)?

At the end of the third quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 39% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in LM a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with LM Positions

The largest stake in Legg Mason, Inc. (NYSE:LM) was held by Trian Partners, which reported holding $148.2 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $83.2 million position. Other investors bullish on the company included GAMCO Investors, Renaissance Technologies, and Millennium Management. In terms of the portfolio weights assigned to each position Factorial Partners allocated the biggest weight to Legg Mason, Inc. (NYSE:LM), around 1.64% of its portfolio. Trian Partners is also relatively very bullish on the stock, dishing out 1.55 percent of its 13F equity portfolio to LM.

Consequently, specific money managers have jumped into Legg Mason, Inc. (NYSE:LM) headfirst. Azora Capital, managed by Ravi Chopra, initiated the biggest position in Legg Mason, Inc. (NYSE:LM). Azora Capital had $3 million invested in the company at the end of the quarter. David E. Shaw's D E Shaw also made a $2.8 million investment in the stock during the quarter. The following funds were also among the new LM investors: Sander Gerber's Hudson Bay Capital Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, and Phill Gross and Robert Atchinson's Adage Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Legg Mason, Inc. (NYSE:LM) but similarly valued. These stocks are The Timken Company (NYSE:TKR), Cedar Fair, L.P. (NYSE:FUN), ICU Medical, Inc. (NASDAQ:ICUI), and NuVasive, Inc. (NASDAQ:NUVA). This group of stocks' market values are closest to LM's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TKR,26,208170,0 FUN,13,99639,5 ICUI,15,234605,0 NUVA,21,253261,-3 Average,18.75,198919,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $199 million. That figure was $466 million in LM's case. The Timken Company (NYSE:TKR) is the most popular stock in this table. On the other hand Cedar Fair, L.P. (NYSE:FUN) is the least popular one with only 13 bullish hedge fund positions. Legg Mason, Inc. (NYSE:LM) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately LM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LM were disappointed as the stock returned 3.5% during the fourth quarter (through the end of November) 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.

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