How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Snap-on Incorporated (NYSE:SNA) and determine whether hedge funds had an edge regarding this stock.
Snap-on Incorporated (NYSE:SNA) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. Snap-on Incorporated (NYSE:SNA) was in 20 hedge funds' portfolios at the end of June. The all time high for this statistics is 31. There were 26 hedge funds in our database with SNA positions at the end of the first quarter. Our calculations also showed that SNA isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
John Rogers of Ariel Investments
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's take a look at the latest hedge fund action encompassing Snap-on Incorporated (NYSE:SNA).
What have hedge funds been doing with Snap-on Incorporated (NYSE:SNA)?
Heading into the third quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards SNA over the last 20 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Ariel Investments was the largest shareholder of Snap-on Incorporated (NYSE:SNA), with a stake worth $135.1 million reported as of the end of September. Trailing Ariel Investments was AQR Capital Management, which amassed a stake valued at $67.6 million. Pzena Investment Management, East Side Capital (RR Partners), and Arrowstreet Capital 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 East Side Capital (RR Partners) allocated the biggest weight to Snap-on Incorporated (NYSE:SNA), around 6.21% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, setting aside 2.06 percent of its 13F equity portfolio to SNA.
Because Snap-on Incorporated (NYSE:SNA) has experienced declining sentiment from the smart money, logic holds that there is a sect of funds that slashed their entire stakes by the end of the second quarter. It's worth mentioning that Greg Eisner's Engineers Gate Manager dumped the largest stake of the "upper crust" of funds monitored by Insider Monkey, worth close to $1.5 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund said goodbye to about $1.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 6 funds by the end of the second quarter.
Let's check out hedge fund activity in other stocks similar to Snap-on Incorporated (NYSE:SNA). These stocks are Trex Company, Inc. (NYSE:TREX), Iron Mountain Incorporated (NYSE:IRM), Textron Inc. (NYSE:TXT), The Scotts Miracle-Gro Company (NYSE:SMG), Molson Coors Beverage Company (NYSE:TAP), Gaming and Leisure Properties Inc (NASDAQ:GLPI), and Melco Resorts & Entertainment Limited (NASDAQ:MLCO). This group of stocks' market caps are similar to SNA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TREX,28,221918,11 IRM,22,64987,3 TXT,24,267696,2 SMG,30,307814,2 TAP,36,274462,2 GLPI,35,498974,0 MLCO,32,610443,4 Average,29.6,320899,3.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.6 hedge funds with bullish positions and the average amount invested in these stocks was $321 million. That figure was $359 million in SNA's case. Molson Coors Beverage Company (NYSE:TAP) is the most popular stock in this table. On the other hand Iron Mountain Incorporated (NYSE:IRM) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Snap-on Incorporated (NYSE:SNA) is even less popular than IRM. Our overall hedge fund sentiment score for SNA is 18.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Hedge funds dodged a bullet by taking a bearish stance towards SNA. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September but managed to beat the market by 19.3 percentage points. Unfortunately SNA wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); SNA investors were disappointed as the stock returned 7% in the third 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.