At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Unum Group (NYSE:UNM) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Unum Group (NYSE:UNM) the right investment to pursue these days? The best stock pickers were in a pessimistic mood. The number of bullish hedge fund bets were cut by 3 recently. Unum Group (NYSE:UNM) was in 22 hedge funds' portfolios at the end of June. The all time high for this statistics is 30. Our calculations also showed that UNM 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.
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 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 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.
Stuart Zimmer of Zimmer Partners
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 precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. 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. With all of this in mind we're going to take a look at the new hedge fund action encompassing Unum Group (NYSE:UNM).
What does smart money think about Unum Group (NYSE:UNM)?
Heading into the third quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the first quarter of 2020. On the other hand, there were a total of 25 hedge funds with a bullish position in UNM a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
The largest stake in Unum Group (NYSE:UNM) was held by Arrowstreet Capital, which reported holding $70.7 million worth of stock at the end of September. It was followed by AQR Capital Management with a $44 million position. Other investors bullish on the company included Two Sigma Advisors, Millennium Management, and D E Shaw. In terms of the portfolio weights assigned to each position Quantinno Capital allocated the biggest weight to Unum Group (NYSE:UNM), around 0.38% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, setting aside 0.13 percent of its 13F equity portfolio to UNM.
Since Unum Group (NYSE:UNM) has faced falling interest from the aggregate hedge fund industry, it's safe to say that there is a sect of funds that slashed their entire stakes by the end of the second quarter. At the top of the heap, Ken Griffin's Citadel Investment Group dumped the largest investment of the "upper crust" of funds monitored by Insider Monkey, comprising an estimated $5.7 million in stock. Phill Gross and Robert Atchinson's fund, Adage Capital Management, also cut its stock, about $2.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 3 funds by the end of the second quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Unum Group (NYSE:UNM) but similarly valued. These stocks are Marriott Vacations Worldwide Corporation (NYSE:VAC), South State Corporation (NASDAQ:SSB), Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE:ASR), Freshpet Inc (NASDAQ:FRPT), Spire Inc. (NYSE:SR), Glacier Bancorp, Inc. (NASDAQ:GBCI), and Iridium Communications Inc. (NASDAQ:IRDM). This group of stocks' market valuations resemble UNM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VAC,24,381087,-1 SSB,24,79638,12 ASR,11,69729,7 FRPT,21,128659,-3 SR,18,40448,5 GBCI,20,61522,8 IRDM,19,223663,-1 Average,19.6,140678,3.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.6 hedge funds with bullish positions and the average amount invested in these stocks was $141 million. That figure was $211 million in UNM's case. Marriott Vacations Worldwide Corporation (NYSE:VAC) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE:ASR) is the least popular one with only 11 bullish hedge fund positions. Unum Group (NYSE:UNM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for UNM is 66.3. 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds 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 and beat the market by 19.3 percentage points. Unfortunately UNM wasn't nearly as popular as these 10 stocks and hedge funds that were betting on UNM were disappointed as the stock returned 3.1% in Q3 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 many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.