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Northrop Grumman Corporation (NOC): Are Hedge Funds Right About This Stock?

·6 min read

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the fourth quarter of 2019. A significant number of hedge funds continued their strong performance in 2020 and 2021 as well. We get to see hedge funds' thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Northrop Grumman Corporation (NYSE:NOC).

Northrop Grumman Corporation (NYSE:NOC) investors should pay attention to an increase in activity from the world's largest hedge funds in recent months. Northrop Grumman Corporation (NYSE:NOC) was in 42 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 47. There were 40 hedge funds in our database with NOC holdings at the end of March. Our calculations also showed that NOC isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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' 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 79 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.

Donald Yacktman of Yacktman Asset Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this biotech stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind let's check out the recent hedge fund action regarding Northrop Grumman Corporation (NYSE:NOC).

Do Hedge Funds Think NOC Is A Good Stock To Buy Now?

At the end of June, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the first quarter of 2020. By comparison, 47 hedge funds held shares or bullish call options in NOC a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is NOC A Good Stock To Buy?
Is NOC A Good Stock To Buy?

The largest stake in Northrop Grumman Corporation (NYSE:NOC) was held by D E Shaw, which reported holding $195.6 million worth of stock at the end of June. It was followed by Renaissance Technologies with a $181.8 million position. Other investors bullish on the company included Yacktman Asset Management, Arrowstreet Capital, and Millennium Management. In terms of the portfolio weights assigned to each position Soapstone Capital allocated the biggest weight to Northrop Grumman Corporation (NYSE:NOC), around 6.02% of its 13F portfolio. Adam Capital is also relatively very bullish on the stock, designating 3.38 percent of its 13F equity portfolio to NOC.

As one would reasonably expect, specific money managers have jumped into Northrop Grumman Corporation (NYSE:NOC) headfirst. Sciencast Management, managed by Qing Li, assembled the most valuable position in Northrop Grumman Corporation (NYSE:NOC). Sciencast Management had $4.2 million invested in the company at the end of the quarter. Jinghua Yan's TwinBeech Capital also made a $3 million investment in the stock during the quarter. The following funds were also among the new NOC investors: Karim Abbadi and Edward McBride's Centiva Capital, Michael Gelband's ExodusPoint Capital, and Greg Poole's Echo Street Capital Management.

Let's now take a look at hedge fund activity in other stocks similar to Northrop Grumman Corporation (NYSE:NOC). These stocks are DoorDash, Inc. (NYSE:DASH), Emerson Electric Co. (NYSE:EMR), The Progressive Corporation (NYSE:PGR), Humana Inc (NYSE:HUM), KE Holdings Inc (NYSE:BEKE), CrowdStrike Holdings, Inc. (NASDAQ:CRWD), and NXP Semiconductors NV (NASDAQ:NXPI). This group of stocks' market caps are closest to NOC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DASH,45,8924479,7 EMR,45,854279,0 PGR,44,1338423,-1 HUM,59,3257015,6 BEKE,31,2712876,-2 CRWD,66,7266652,-11 NXPI,52,1336949,-1 Average,48.9,3670096,-0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.9 hedge funds with bullish positions and the average amount invested in these stocks was $3670 million. That figure was $1053 million in NOC's case. CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is the most popular stock in this table. On the other hand KE Holdings Inc (NYSE:BEKE) is the least popular one with only 31 bullish hedge fund positions. Northrop Grumman Corporation (NYSE:NOC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NOC is 49.5. 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 negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.9% in 2021 through October 1st and surpassed the market again by 5.6 percentage points. Unfortunately NOC wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); NOC investors were disappointed as the stock returned -0.3% since the end of June (through 10/1) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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