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 (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let's see whether Arch Capital Group Ltd. (NASDAQ:ACGL) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Arch Capital Group Ltd. (NASDAQ:ACGL) investors should pay attention to an increase in hedge fund sentiment of late. Our calculations also showed that ACGL isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
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 S&P 500 ETFs by more than 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. 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.
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Jim Simons of Renaissance Technologies[/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. Now we're going to check out the latest hedge fund action regarding Arch Capital Group Ltd. (NASDAQ:ACGL).
How are hedge funds trading Arch Capital Group Ltd. (NASDAQ:ACGL)?
At Q4's end, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ACGL over the last 18 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, FPR Partners held the most valuable stake in Arch Capital Group Ltd. (NASDAQ:ACGL), which was worth $610 million at the end of the third quarter. On the second spot was Polar Capital which amassed $262.1 million worth of shares. Renaissance Technologies, AQR Capital Management, and GLG Partners 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 FPR Partners allocated the biggest weight to Arch Capital Group Ltd. (NASDAQ:ACGL), around 12.67% of its 13F portfolio. Polar Capital is also relatively very bullish on the stock, designating 2.28 percent of its 13F equity portfolio to ACGL.
As one would reasonably expect, key hedge funds were breaking ground themselves. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, established the most valuable position in Arch Capital Group Ltd. (NASDAQ:ACGL). LMR Partners had $17.6 million invested in the company at the end of the quarter. Donald Sussman's Paloma Partners also made a $3.2 million investment in the stock during the quarter. The other funds with brand new ACGL positions are Mika Toikka's AlphaCrest Capital Management, Ken Griffin's Citadel Investment Group, and Alec Litowitz and Ross Laser's Magnetar Capital.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Arch Capital Group Ltd. (NASDAQ:ACGL) but similarly valued. These stocks are Church & Dwight Co., Inc. (NYSE:CHD), Discovery Communications Inc. (NASDAQ:DISCA), Cincinnati Financial Corporation (NASDAQ:CINF), and MGM Resorts International (NYSE:MGM). This group of stocks' market caps resemble ACGL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHD,37,359916,0 DISCA,38,290567,8 CINF,31,543386,7 MGM,50,2230713,-2 Average,39,856146,3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $856 million. That figure was $1251 million in ACGL's case. MGM Resorts International (NYSE:MGM) is the most popular stock in this table. On the other hand Cincinnati Financial Corporation (NASDAQ:CINF) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Arch Capital Group Ltd. (NASDAQ:ACGL) is even less popular than CINF. Hedge funds dodged a bullet by taking a bearish stance towards ACGL. Our calculations showed that the top 20 most popular hedge fund stocks 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 managed to beat the market by 3.2 percentage points. Unfortunately ACGL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ACGL investors were disappointed as the stock returned -36.5% 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 most of these stocks already outperformed the market so far in Q1.
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.