Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like AECOM (NYSE:ACM).
Is AECOM (NYSE:ACM) worth your attention right now? Money managers are getting more optimistic. The number of bullish hedge fund bets inched up by 4 recently. Our calculations also showed that ACM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ACM was in 26 hedge funds' portfolios at the end of September. There were 22 hedge funds in our database with ACM positions at the end of the previous quarter. Video: Click the image to 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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.
[caption id="attachment_199503" align="aligncenter" width="450"] Jeffrey Smith of Starboard Value LP[/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 review the recent hedge fund action encompassing AECOM (NYSE:ACM).
How have hedgies been trading AECOM (NYSE:ACM)?
At Q3's end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the second quarter of 2019. On the other hand, there were a total of 18 hedge funds with a bullish position in ACM a year ago. With the smart money's capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Starboard Value LP held the most valuable stake in AECOM (NYSE:ACM), which was worth $205.8 million at the end of the third quarter. On the second spot was Luminus Management which amassed $175.3 million worth of shares. Lyrical Asset Management, Citadel Investment Group, and Pzena Investment Management 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 Engine Capital allocated the biggest weight to AECOM (NYSE:ACM), around 9.4% of its portfolio. Starboard Value LP is also relatively very bullish on the stock, dishing out 6.86 percent of its 13F equity portfolio to ACM.
Consequently, key money managers were breaking ground themselves. Centenus Global Management, managed by Sara Nainzadeh, created the most outsized call position in AECOM (NYSE:ACM). Centenus Global Management had $11.3 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $8.5 million position during the quarter. The other funds with new positions in the stock are Gregg Moskowitz's Interval Partners, Louis Bacon's Moore Global Investments, and Minhua Zhang's Weld Capital Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as AECOM (NYSE:ACM) but similarly valued. These stocks are Cemex SAB de CV (NYSE:CX), New York Community Bancorp, Inc. (NYSE:NYCB), Skechers USA Inc (NYSE:SKX), and TCF Financial Corporation (NASDAQ:TCF). This group of stocks' market caps match ACM's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CX,9,59628,-2 NYCB,23,297857,4 SKX,26,520591,3 TCF,28,359418,8 Average,21.5,309374,3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $309 million. That figure was $956 million in ACM's case. TCF Financial Corporation (NASDAQ:TCF) is the most popular stock in this table. On the other hand Cemex SAB de CV (NYSE:CX) is the least popular one with only 9 bullish hedge fund positions. AECOM (NYSE:ACM) is not the most popular stock in this group but hedge fund interest is still above average. 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 ACM as the stock returned 15.4% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.