It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. 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 Primerica, Inc. (NYSE:PRI).
Is Primerica, Inc. (NYSE:PRI) a buy right now? The best stock pickers are in a pessimistic mood. The number of long hedge fund positions retreated by 3 in recent months. Our calculations also showed that PRI 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.
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_192997" align="aligncenter" width="600"] Glenn Greenberg of Brave Warrior Capital[/caption]
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. Let's check out the fresh hedge fund action surrounding Primerica, Inc. (NYSE:PRI).
What have hedge funds been doing with Primerica, Inc. (NYSE:PRI)?
At Q3's end, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from the previous quarter. By comparison, 12 hedge funds held shares or bullish call options in PRI a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
The largest stake in Primerica, Inc. (NYSE:PRI) was held by Cantillon Capital Management, which reported holding $116.7 million worth of stock at the end of September. It was followed by Brave Warrior Capital with a $111.7 million position. Other investors bullish on the company included GLG Partners, Millennium Management, and Prospector Partners. In terms of the portfolio weights assigned to each position Brave Warrior Capital allocated the biggest weight to Primerica, Inc. (NYSE:PRI), around 5.96% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, setting aside 1.81 percent of its 13F equity portfolio to PRI.
Seeing as Primerica, Inc. (NYSE:PRI) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there lies a certain "tier" of funds that slashed their full holdings in the third quarter. Intriguingly, Dmitry Balyasny's Balyasny Asset Management sold off the largest position of the 750 funds watched by Insider Monkey, comprising close to $1.5 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund said goodbye to about $0.7 million worth. These moves are interesting, as aggregate hedge fund interest fell by 3 funds in the third quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Primerica, Inc. (NYSE:PRI) but similarly valued. These stocks are Aluminum Corp. of China Limited (NYSE:ACH), Parsley Energy Inc (NYSE:PE), Trex Company, Inc. (NYSE:TREX), and Williams-Sonoma, Inc. (NYSE:WSM). This group of stocks' market values are similar to PRI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ACH,3,4206,-2 PE,44,778914,8 TREX,18,104493,-1 WSM,24,287642,-3 Average,22.25,293814,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $294 million. That figure was $341 million in PRI's case. Parsley Energy Inc (NYSE:PE) is the most popular stock in this table. On the other hand Aluminum Corp. of China Limited (NYSE:ACH) is the least popular one with only 3 bullish hedge fund positions. Primerica, Inc. (NYSE:PRI) 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 PRI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PRI were disappointed as the stock returned 5.5% 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.