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Jefferies Financial Group Inc. (JEF) vs. Top 20 Hedge Fund Stocks in 2019

Debasis Saha

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. What do these smart investors think about Jefferies Financial Group Inc. (NYSE:JEF)?

Jefferies Financial Group Inc. (NYSE:JEF) has experienced a decrease in support from the world's most elite money managers recently. JEF was in 31 hedge funds' portfolios at the end of the third quarter of 2019. There were 34 hedge funds in our database with JEF holdings at the end of the previous quarter. Our calculations also showed that JEF isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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_26397" align="alignnone" width="600"] Ray Dalio of Bridgewater Associates[/caption]

BRIDGEWATER ASSOCIATES

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind we're going to check out the fresh hedge fund action encompassing Jefferies Financial Group Inc. (NYSE:JEF).

How are hedge funds trading Jefferies Financial Group Inc. (NYSE:JEF)?

At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the second quarter of 2019. By comparison, 39 hedge funds held shares or bullish call options in JEF a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is JEF A Good Stock To Buy?

The largest stake in Jefferies Financial Group Inc. (NYSE:JEF) was held by First Pacific Advisors, which reported holding $380.7 million worth of stock at the end of September. It was followed by Arlington Value Capital with a $72.1 million position. Other investors bullish on the company included Moerus Capital Management, Wallace Capital Management, and Private Capital Management. In terms of the portfolio weights assigned to each position Moerus Capital Management allocated the biggest weight to Jefferies Financial Group Inc. (NYSE:JEF), around 13.12% of its 13F portfolio. Pacifica Capital Investments is also relatively very bullish on the stock, setting aside 9.35 percent of its 13F equity portfolio to JEF.

Due to the fact that Jefferies Financial Group Inc. (NYSE:JEF) has experienced a decline in interest from the smart money, we can see that there exists a select few money managers that decided to sell off their entire stakes by the end of the third quarter. Intriguingly, Dmitry Balyasny's Balyasny Asset Management dropped the biggest position of the "upper crust" of funds followed by Insider Monkey, worth an estimated $11.2 million in stock. Phill Gross and Robert Atchinson's fund, Adage Capital Management, also cut its stock, about $6 million worth. These moves are interesting, as total hedge fund interest was cut by 3 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks similar to Jefferies Financial Group Inc. (NYSE:JEF). We will take a look at Synovus Financial Corp. (NYSE:SNV), Syneos Health, Inc. (NASDAQ:SYNH), Zynga Inc (NASDAQ:ZNGA), and Jabil Inc. (NYSE:JBL). This group of stocks' market values resemble JEF's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SNV,36,461625,0 SYNH,20,211629,0 ZNGA,39,1138358,-9 JBL,30,437935,4 Average,31.25,562387,-1.25 [/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 $562 million. That figure was $628 million in JEF's case. Zynga Inc (NASDAQ:ZNGA) is the most popular stock in this table. On the other hand Syneos Health, Inc. (NASDAQ:SYNH) is the least popular one with only 20 bullish hedge fund positions. Jefferies Financial Group Inc. (NYSE:JEF) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. A small number of hedge funds were also right about betting on JEF, though not to the same extent, as the stock returned 33.4% in 2019 (as of 12/23) and outperformed the market. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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