We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Northrop Grumman Corporation (NYSE:NOC)? The smart money sentiment can provide an answer to this question.
Northrop Grumman Corporation (NYSE:NOC) was in 44 hedge funds' portfolios at the end of December. NOC has experienced a decrease in enthusiasm from smart money recently. There were 46 hedge funds in our database with NOC holdings at the end of the previous quarter. Our calculations also showed that NOC isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 41 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_27480" align="aligncenter" width="399"] Israel Englander of Millennium Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's review the latest hedge fund action regarding Northrop Grumman Corporation (NYSE:NOC).
How have hedgies been trading Northrop Grumman Corporation (NYSE:NOC)?
Heading into the first quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the third quarter of 2019. By comparison, 29 hedge funds held shares or bullish call options in NOC 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.
According to Insider Monkey's hedge fund database, Cliff Asness's AQR Capital Management has the most valuable position in Northrop Grumman Corporation (NYSE:NOC), worth close to $368.9 million, comprising 0.4% of its total 13F portfolio. The second largest stake is held by Millennium Management, led by Israel Englander, holding a $153.4 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Some other members of the smart money that hold long positions comprise Brandon Haley's Holocene Advisors, Panayotis Takis Sparaggis's Alkeon Capital Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Ariose Capital allocated the biggest weight to Northrop Grumman Corporation (NYSE:NOC), around 7.24% of its 13F portfolio. Heard Capital is also relatively very bullish on the stock, designating 6.44 percent of its 13F equity portfolio to NOC.
Judging by the fact that Northrop Grumman Corporation (NYSE:NOC) has witnessed falling interest from the smart money, it's easy to see that there were a few hedgies who were dropping their positions entirely by the end of the third quarter. Interestingly, Aaron Cowen's Suvretta Capital Management cut the largest position of the "upper crust" of funds followed by Insider Monkey, totaling close to $112.4 million in stock, and Ken Heebner's Capital Growth Management was right behind this move, as the fund sold off about $43.5 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 2 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Northrop Grumman Corporation (NYSE:NOC). We will take a look at Lloyds Banking Group PLC (NYSE:LYG), Illinois Tool Works Inc. (NYSE:ITW), Prologis Inc (NYSE:PLD), and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). This group of stocks' market valuations resemble NOC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LYG,5,66676,-3 ITW,32,470691,-1 PLD,35,456205,4 VRTX,53,3271636,3 Average,31.25,1066302,0.75 [/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 $1066 million. That figure was $1320 million in NOC's case. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 5 bullish hedge fund positions. Northrop Grumman Corporation (NYSE:NOC) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but still beat the market by 12.9 percentage points. Hedge funds were also right about betting on NOC, though not to the same extent, as the stock returned -4.3% during the first four months of 2020 (through May 1st) and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.