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Were Hedge Funds Right About Bank of America Corporation (BAC)?

Reymerlyn Martin

Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won't accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

Is Bank of America Corporation (NYSE:BAC) an excellent investment today? The best stock pickers are taking a bearish view. The number of long hedge fund positions went down by 3 in recent months. Our calculations also showed that BAC is among the 30 most popular stocks among hedge funds, ranking 11th.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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.

TIGER MANAGEMENT

Let's take a peek at the fresh hedge fund action regarding Bank of America Corporation (NYSE:BAC).

How have hedgies been trading Bank of America Corporation (NYSE:BAC)?

Heading into the first quarter of 2019, a total of 99 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in BAC over the last 14 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

BAC_mar2019

The largest stake in Bank of America Corporation (NYSE:BAC) was held by Berkshire Hathaway, which reported holding $22081.6 million worth of stock at the end of September. It was followed by Lansdowne Partners with a $425.3 million position. Other investors bullish on the company included Pzena Investment Management, Theleme Partners, and First Pacific Advisors.

Seeing as Bank of America Corporation (NYSE:BAC) has experienced falling interest from the aggregate hedge fund industry, it's safe to say that there was a specific group of hedge funds that elected to cut their positions entirely last quarter. Intriguingly, John Armitage's Egerton Capital Limited sold off the largest position of all the hedgies watched by Insider Monkey, valued at about $351 million in call options. Julian Robertson's fund, Tiger Management, also dumped its call options, about $109.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 3 funds last quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Bank of America Corporation (NYSE:BAC) but similarly valued. We will take a look at UnitedHealth Group Inc. (NYSE:UNH), Verizon Communications Inc. (NYSE:VZ), The Procter & Gamble Company (NYSE:PG), and Wells Fargo & Company (NYSE:WFC). This group of stocks' market values resemble BAC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UNH,82,6875350,11 VZ,62,1772547,11 PG,60,9259931,7 WFC,77,25411606,-2 Average,70.25,10829859,6.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 70.25 hedge funds with bullish positions and the average amount invested in these stocks was $10830 million. That figure was $27371 million in BAC's case. UnitedHealth Group Inc. (NYSE:UNH) is the most popular stock in this table. On the other hand The Procter & Gamble Company (NYSE:PG) is the least popular one with only 60 bullish hedge fund positions. Compared to these stocks Bank of America Corporation (NYSE:BAC) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on BAC as the stock returned 19.5% and outperformed the market as well.

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

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