The elite funds run by legendary investors such as David Tepper and Dan Loeb make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don't follow. Because of their pay structures, they have strong incentives to do the research necessary to beat the market. That's why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at TransDigm Group Incorporated (NYSE:TDG) from the perspective of those elite funds.
TransDigm Group Incorporated (NYSE:TDG) has experienced a decrease in enthusiasm from smart money of late. Our calculations also showed that TDG isn't among the 30 most popular stocks among hedge funds. Video: Click the image to 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 hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to go over the new hedge fund action encompassing TransDigm Group Incorporated (NYSE:TDG).
What does smart money think about TransDigm Group Incorporated (NYSE:TDG)?
At Q2's end, a total of 48 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards TDG over the last 16 quarters. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
[caption id="attachment_26088" align="aligncenter" width="508"] Chase Coleman of Tiger Global[/caption]
More specifically, Tiger Global Management LLC was the largest shareholder of TransDigm Group Incorporated (NYSE:TDG), with a stake worth $999.5 million reported as of the end of March. Trailing Tiger Global Management LLC was Lone Pine Capital, which amassed a stake valued at $767.1 million. Stockbridge Partners, Windacre Partnership, and Matrix Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that TransDigm Group Incorporated (NYSE:TDG) has faced falling interest from hedge fund managers, we can see that there was a specific group of fund managers that slashed their full holdings in the second quarter. At the top of the heap, Philip Hilal's Clearfield Capital sold off the largest investment of the 750 funds followed by Insider Monkey, worth an estimated $22.7 million in stock, and Joel Greenblatt's Gotham Asset Management was right behind this move, as the fund dropped about $14.2 million worth. These transactions are important to note, as total hedge fund interest fell by 4 funds in the second quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as TransDigm Group Incorporated (NYSE:TDG) but similarly valued. We will take a look at IHS Markit Ltd. (NYSE:INFO), Dollar Tree, Inc. (NASDAQ:DLTR), T. Rowe Price Group, Inc. (NASDAQ:TROW), and Ventas, Inc. (NYSE:VTR). All of these stocks' market caps resemble TDG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position INFO,28,998482,-2 DLTR,49,2013841,1 TROW,30,330195,4 VTR,18,385834,-1 Average,31.25,932088,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $932 million. That figure was $5078 million in TDG's case. Dollar Tree, Inc. (NASDAQ:DLTR) is the most popular stock in this table. On the other hand Ventas, Inc. (NYSE:VTR) is the least popular one with only 18 bullish hedge fund positions. TransDigm Group Incorporated (NYSE:TDG) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on TDG as the stock returned 14% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.