Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Honda Motor Co Ltd (NYSE:HMC) has seen an increase in support from the world's most elite money managers recently. Our calculations also showed that HMC 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.
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 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. 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.
[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to review the fresh hedge fund action regarding Honda Motor Co Ltd (NYSE:HMC).
How are hedge funds trading Honda Motor Co Ltd (NYSE:HMC)?
At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 43% from the previous quarter. By comparison, 11 hedge funds held shares or bullish call options in HMC a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, holds the largest position in Honda Motor Co Ltd (NYSE:HMC). Renaissance Technologies has a $75.8 million position in the stock, comprising 0.1% of its 13F portfolio. Coming in second is Orbis Investment Management, led by William B. Gray, holding a $18.6 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other peers with similar optimism contain Israel Englander's Millennium Management, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital. In terms of the portfolio weights assigned to each position LMR Partners allocated the biggest weight to Honda Motor Co Ltd (NYSE:HMC), around 0.48% of its 13F portfolio. Orbis Investment Management is also relatively very bullish on the stock, dishing out 0.14 percent of its 13F equity portfolio to HMC.
Now, key hedge funds have been driving this bullishness. Orbis Investment Management, managed by William B. Gray, established the largest position in Honda Motor Co Ltd (NYSE:HMC). Orbis Investment Management had $18.6 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners also made a $9.7 million investment in the stock during the quarter. The following funds were also among the new HMC investors: Gavin Saitowitz and Cisco J. del Valle's Springbok Capital and Dmitry Balyasny's Balyasny Asset Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Honda Motor Co Ltd (NYSE:HMC) but similarly valued. These stocks are Edwards Lifesciences Corporation (NYSE:EW), Aon plc (NYSE:AON), The Progressive Corporation (NYSE:PGR), and Illumina, Inc. (NASDAQ:ILMN). All of these stocks' market caps are closest to HMC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EW,34,1384665,1 AON,42,2479390,8 PGR,48,1562764,-2 ILMN,37,1183062,-6 Average,40.25,1652470,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 40.25 hedge funds with bullish positions and the average amount invested in these stocks was $1652 million. That figure was $130 million in HMC's case. The Progressive Corporation (NYSE:PGR) is the most popular stock in this table. On the other hand Edwards Lifesciences Corporation (NYSE:EW) is the least popular one with only 34 bullish hedge fund positions. Compared to these stocks Honda Motor Co Ltd (NYSE:HMC) is even less popular than EW. 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. A small number of hedge funds were also right about betting on HMC, though not to the same extent, as the stock returned 7.8% during the fourth quarter (through 11/30) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.