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Hedge Funds Are Selling Arthur J. Gallagher & Co. (AJG)

Abigail Fisher

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 Arthur J. Gallagher & Co. (NYSE:AJG).

Arthur J. Gallagher & Co. (NYSE:AJG) investors should pay attention to a decrease in support from the world's most elite money managers recently. AJG was in 23 hedge funds' portfolios at the end of September. There were 25 hedge funds in our database with AJG holdings at the end of the previous quarter. Our calculations also showed that AJG 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.

5 Most Popular Stocks Among Hedge Funds

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 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.

[caption id="attachment_340081" align="aligncenter" width="450"] Phill Gross of Adage Capital Management[/caption]

Phill Gross of Adage Capital Management

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 go over the fresh hedge fund action encompassing Arthur J. Gallagher & Co. (NYSE:AJG).

What does smart money think about Arthur J. Gallagher & Co. (NYSE:AJG)?

At Q3's end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AJG over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

AJG_dec2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Balyasny Asset Management, managed by Dmitry Balyasny, holds the biggest position in Arthur J. Gallagher & Co. (NYSE:AJG). Balyasny Asset Management has a $63.5 million position in the stock, comprising 0.4% of its 13F portfolio. The second most bullish fund manager is Phill Gross and Robert Atchinson of Adage Capital Management, with a $56.1 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish contain Greg Poole's Echo Street Capital Management, Israel Englander's Millennium Management and Steve Cohen's Point72 Asset Management. In terms of the portfolio weights assigned to each position Capital Returns Management allocated the biggest weight to Arthur J. Gallagher & Co. (NYSE:AJG), around 9.31% of its 13F portfolio. Prana Capital Management is also relatively very bullish on the stock, earmarking 2.26 percent of its 13F equity portfolio to AJG.

Due to the fact that Arthur J. Gallagher & Co. (NYSE:AJG) has faced declining sentiment from hedge fund managers, it's easy to see that there exists a select few fund managers that elected to cut their positions entirely last quarter. Intriguingly, David E. Shaw's D E Shaw dropped the biggest position of the "upper crust" of funds watched by Insider Monkey, totaling about $9.5 million in stock. John Overdeck and David Siegel's fund, Two Sigma Advisors, also sold off its stock, about $8.4 million worth. These transactions are interesting, as total hedge fund interest dropped by 2 funds last quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Arthur J. Gallagher & Co. (NYSE:AJG) but similarly valued. These stocks are Magna International Inc. (NYSE:MGA), Marvell Technology Group Ltd. (NASDAQ:MRVL), Credicorp Ltd. (NYSE:BAP), and Halliburton Company (NYSE:HAL). This group of stocks' market valuations resemble AJG's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MGA,17,432332,3 MRVL,31,682428,-6 BAP,22,655780,2 HAL,31,817394,-2 Average,25.25,646984,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $647 million. That figure was $287 million in AJG's case. Marvell Technology Group Ltd. (NASDAQ:MRVL) is the most popular stock in this table. On the other hand Magna International Inc. (NYSE:MGA) is the least popular one with only 17 bullish hedge fund positions. Arthur J. Gallagher & Co. (NYSE:AJG) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately AJG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AJG investors were disappointed as the stock returned 4.1% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.

Disclosure: None. This article was originally published at Insider Monkey.

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