U.S. Markets open in 7 hrs 9 mins

Jefferies Financial Group Inc. (JEF): Are Hedge Funds Right About This Stock?

Asma UL Husna

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Jefferies Financial Group Inc. (NYSE:JEF).

Is Jefferies Financial Group Inc. (NYSE:JEF) a healthy stock for your portfolio? Investors who are in the know are getting less optimistic. The number of bullish hedge fund positions went down by 3 lately. 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 below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_746830" align="aligncenter" width="473"] Matthew Hulsizer of PEAK6 Capital[/caption]

Matthew Hulsizer PEAK6 Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's analyze the fresh hedge fund action regarding Jefferies Financial Group Inc. (NYSE:JEF).

What have hedge funds been doing with Jefferies Financial Group Inc. (NYSE:JEF)?

At Q3's end, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the previous quarter. On the other hand, there were a total of 39 hedge funds with a bullish position in JEF a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

JEF_dec2019

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 portfolio. Pacifica Capital Investments is also relatively very bullish on the stock, earmarking 9.35 percent of its 13F equity portfolio to JEF.

Seeing as Jefferies Financial Group Inc. (NYSE:JEF) has experienced a decline in interest from hedge fund managers, logic holds that there is a sect of fund managers that elected to cut their positions entirely heading into Q4. Interestingly, Dmitry Balyasny's Balyasny Asset Management dropped the largest stake of the 750 funds monitored by Insider Monkey, valued at an estimated $11.2 million in stock, and Phill Gross and Robert Atchinson's Adage Capital Management was right behind this move, as the fund dumped about $6 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 3 funds heading into Q4.

Let's go over hedge fund activity in other stocks similar to Jefferies Financial Group Inc. (NYSE:JEF). These stocks are Synovus Financial Corp. (NYSE:SNV), Syneos Health, Inc. (NASDAQ:SYNH), Zynga Inc (NASDAQ:ZNGA), and Jabil Inc. (NYSE:JBL). This group of stocks' market caps match JEF's market cap.

[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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A shrinking number of hedge funds were also right about betting on JEF as the stock returned 14.3% during the first two months of Q4 and outperformed the market by an even larger margin.

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

Related Content