We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Leggett & Platt, Inc. (NYSE:LEG)? The smart money sentiment can provide an answer to this question.
Is Leggett & Platt, Inc. (NYSE:LEG) a good investment right now? Prominent investors are taking a bullish view. The number of bullish hedge fund bets went up by 15 lately. Our calculations also showed that LEG isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). LEG was in 27 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 12 hedge funds in our database with LEG holdings at the end of the previous quarter.
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 S&P 500 ETFs by 41 percentage points since March 2017 (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.
[caption id="attachment_26092" align="aligncenter" width="400"] Joel Greenblatt of Gotham Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind let's take a glance at the recent hedge fund action regarding Leggett & Platt, Inc. (NYSE:LEG).
How have hedgies been trading Leggett & Platt, Inc. (NYSE:LEG)?
At the end of the fourth quarter, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 125% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LEG over the last 18 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Israel Englander's Millennium Management has the largest position in Leggett & Platt, Inc. (NYSE:LEG), worth close to $20.8 million, amounting to less than 0.1%% of its total 13F portfolio. The second largest stake is held by Renaissance Technologies, which holds a $19.2 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other members of the smart money that hold long positions include Ken Griffin's Citadel Investment Group, Joel Greenblatt's Gotham Asset Management and Brandon Haley's Holocene Advisors. In terms of the portfolio weights assigned to each position Neo Ivy Capital allocated the biggest weight to Leggett & Platt, Inc. (NYSE:LEG), around 0.81% of its 13F portfolio. Gotham Asset Management is also relatively very bullish on the stock, earmarking 0.19 percent of its 13F equity portfolio to LEG.
With a general bullishness amongst the heavyweights, specific money managers have jumped into Leggett & Platt, Inc. (NYSE:LEG) headfirst. Renaissance Technologies, created the most outsized position in Leggett & Platt, Inc. (NYSE:LEG). Renaissance Technologies had $19.2 million invested in the company at the end of the quarter. Joel Greenblatt's Gotham Asset Management also initiated a $10.6 million position during the quarter. The following funds were also among the new LEG investors: Cliff Asness's AQR Capital Management, D. E. Shaw's D E Shaw, and John Overdeck and David Siegel's Two Sigma Advisors.
Let's go over hedge fund activity in other stocks similar to Leggett & Platt, Inc. (NYSE:LEG). These stocks are Grupo Aeroportuario del Pacifico (NYSE:PAC), CDK Global Inc (NASDAQ:CDK), Ascendis Pharma A/S (NASDAQ:ASND), and Sibanye Gold Ltd (NYSE:SBGL). This group of stocks' market valuations are closest to LEG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PAC,7,144956,4 CDK,25,356570,-4 ASND,38,2756276,4 SBGL,13,187761,-2 Average,20.75,861391,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $861 million. That figure was $102 million in LEG's case. Ascendis Pharma A/S (NASDAQ:ASND) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Pacifico (NYSE:PAC) is the least popular one with only 7 bullish hedge fund positions. Leggett & Platt, Inc. (NYSE:LEG) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately LEG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LEG were disappointed as the stock returned -45.4% during the same time period 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. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.