How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Harley-Davidson, Inc. (NYSE:HOG) and determine whether hedge funds had an edge regarding this stock.
Harley-Davidson, Inc. (NYSE:HOG) has experienced an increase in hedge fund sentiment recently. Harley-Davidson, Inc. (NYSE:HOG) was in 30 hedge funds' portfolios at the end of June. The all time high for this statistics is 26. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 17 hedge funds in our database with HOG holdings at the end of March. Our calculations also showed that HOG isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Cliff Asness of AQR Capital Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let's take a look at the fresh hedge fund action surrounding Harley-Davidson, Inc. (NYSE:HOG).
What does smart money think about Harley-Davidson, Inc. (NYSE:HOG)?
At the end of the second quarter, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 76% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in HOG over the last 20 quarters. With hedge funds' capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
The largest stake in Harley-Davidson, Inc. (NYSE:HOG) was held by Impala Asset Management, which reported holding $91.6 million worth of stock at the end of September. It was followed by H Partners Management with a $83.2 million position. Other investors bullish on the company included Arrowstreet Capital, Brahman Capital, and D E Shaw. In terms of the portfolio weights assigned to each position H Partners Management allocated the biggest weight to Harley-Davidson, Inc. (NYSE:HOG), around 18.68% of its 13F portfolio. 1060 Capital Management is also relatively very bullish on the stock, designating 11.17 percent of its 13F equity portfolio to HOG.
As one would reasonably expect, key hedge funds were leading the bulls' herd. H Partners Management, managed by Rehan Jaffer, created the biggest position in Harley-Davidson, Inc. (NYSE:HOG). H Partners Management had $83.2 million invested in the company at the end of the quarter. Mitch Kuflik and Rob Sobel's Brahman Capital also initiated a $39.7 million position during the quarter. The other funds with brand new HOG positions are Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, Cliff Asness's AQR Capital Management, and Kamyar Khajavi's MIK Capital.
Let's also examine hedge fund activity in other stocks similar to Harley-Davidson, Inc. (NYSE:HOG). These stocks are Halozyme Therapeutics, Inc. (NASDAQ:HALO), PS Business Parks Inc (NYSE:PSB), Emcor Group Inc (NYSE:EME), FibroGen Inc (NASDAQ:FGEN), Cirrus Logic, Inc. (NASDAQ:CRUS), Silgan Holdings Inc. (NASDAQ:SLGN), and Spirit Realty Capital Inc (NYSE:SRC). All of these stocks' market caps are closest to HOG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HALO,26,246712,3 PSB,20,123459,3 EME,29,191491,5 FGEN,25,310554,3 CRUS,33,315676,5 SLGN,19,183360,3 SRC,18,154998,0 Average,24.3,218036,3.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.3 hedge funds with bullish positions and the average amount invested in these stocks was $218 million. That figure was $393 million in HOG's case. Cirrus Logic, Inc. (NASDAQ:CRUS) is the most popular stock in this table. On the other hand Spirit Realty Capital Inc (NYSE:SRC) is the least popular one with only 18 bullish hedge fund positions. Harley-Davidson, Inc. (NYSE:HOG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for HOG is 80. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. Hedge funds were also right about betting on HOG as the stock returned 18% during Q3 (through September 14th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.