Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of TransDigm Group Incorporated (NYSE:TDG).
Is TransDigm Group Incorporated (NYSE:TDG) a buy, sell, or hold? Hedge funds are betting on the stock. The number of bullish hedge fund positions increased by 8 recently. Our calculations also showed that TDG 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_25251" align="aligncenter" width="450"] George Soros of Soros Fund Management[/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. We're going to review the key hedge fund action regarding TransDigm Group Incorporated (NYSE:TDG).
What have hedge funds been doing with TransDigm Group Incorporated (NYSE:TDG)?
Heading into the fourth quarter of 2019, a total of 56 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TDG over the last 17 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
More specifically, Tiger Global Management was the largest shareholder of TransDigm Group Incorporated (NYSE:TDG), with a stake worth $1075.7 million reported as of the end of September. Trailing Tiger Global Management was Lone Pine Capital, which amassed a stake valued at $668.6 million. Stockbridge Partners, Windacre Partnership, and Egerton Capital Limited were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position AltaRock Partners allocated the biggest weight to TransDigm Group Incorporated (NYSE:TDG), around 26.39% of its portfolio. Stockbridge Partners is also relatively very bullish on the stock, earmarking 23.82 percent of its 13F equity portfolio to TDG.
Consequently, some big names have jumped into TransDigm Group Incorporated (NYSE:TDG) headfirst. Steadfast Capital Management, managed by Robert Pitts, initiated the most valuable position in TransDigm Group Incorporated (NYSE:TDG). Steadfast Capital Management had $118.3 million invested in the company at the end of the quarter. Renaissance Technologies also made a $26.9 million investment in the stock during the quarter. The other funds with brand new TDG positions are Ken Griffin's Citadel Investment Group, George Soros's Soros Fund Management, and Matthew Hulsizer's PEAK6 Capital Management.
Let's also examine hedge fund activity in other stocks similar to TransDigm Group Incorporated (NYSE:TDG). We will take a look at Republic Services, Inc. (NYSE:RSG), Chunghwa Telecom Co., Ltd (NYSE:CHT), Eversource Energy (NYSE:ES), and Mercadolibre Inc (NASDAQ:MELI). All of these stocks' market caps match TDG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RSG,31,625488,7 CHT,5,117483,2 ES,19,739026,-2 MELI,45,3156793,-7 Average,25,1159698,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $1160 million. That figure was $5183 million in TDG's case. Mercadolibre Inc (NASDAQ:MELI) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks TransDigm Group Incorporated (NYSE:TDG) is more popular among hedge funds. 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. Hedge funds were also right about betting on TDG, though not to the same extent, as the stock returned 8.9% during the fourth quarter (through the end of November) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.