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Were Hedge Funds Right About Betting On Leidos Holdings Inc (LDOS)?

Reymerlyn Martin

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.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended December 31, so let’s proceed with the discussion of the hedge fund sentiment on Leidos Holdings Inc (NYSE:LDOS).

Is Leidos Holdings Inc (NYSE:LDOS) a buy here? Money managers are turning bullish. The number of bullish hedge fund bets improved by 2 in recent months. Our calculations also showed that LDOS isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). LDOS was in 27 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 25 hedge funds in our database with LDOS holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_189632" align="aligncenter" width="400"] David Harding of Winton Capital Management[/caption]

David Harding

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. Now let's take a look at the recent hedge fund action surrounding Leidos Holdings Inc (NYSE:LDOS).

What does smart money think about Leidos Holdings Inc (NYSE:LDOS)?

Heading into the first quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the third quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in LDOS a year ago. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

The largest stake in Leidos Holdings Inc (NYSE:LDOS) was held by Southpoint Capital Advisors, which reported holding $201.3 million worth of stock at the end of September. It was followed by Samlyn Capital with a $43.6 million position. Other investors bullish on the company included Two Sigma Advisors, AQR Capital Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Southpoint Capital Advisors allocated the biggest weight to Leidos Holdings Inc (NYSE:LDOS), around 7.25% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, designating 1.58 percent of its 13F equity portfolio to LDOS.

As industrywide interest jumped, key hedge funds were breaking ground themselves. Renaissance Technologies, founded by Jim Simons, assembled the largest position in Leidos Holdings Inc (NYSE:LDOS). Renaissance Technologies had $30.9 million invested in the company at the end of the quarter. Donald Sussman's Paloma Partners also made a $1.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors, and David Harding's Winton Capital Management.

Let's check out hedge fund activity in other stocks similar to Leidos Holdings Inc (NYSE:LDOS). We will take a look at W.P. Carey Inc. REIT (NYSE:WPC), Gartner Inc (NYSE:IT), Liberty Global Plc (NASDAQ:LBTYK), and International Flavors & Fragrances Inc (NYSE:IFF). This group of stocks' market caps resemble LDOS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WPC,21,88287,6 IT,26,727134,4 LBTYK,44,3362668,0 IFF,28,290762,6 Average,29.75,1117213,4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $1117 million. That figure was $467 million in LDOS's case. Liberty Global Plc (NASDAQ:LBTYK) is the most popular stock in this table. On the other hand W.P. Carey Inc. REIT (NYSE:WPC) is the least popular one with only 21 bullish hedge fund positions. Leidos Holdings Inc (NYSE:LDOS) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on LDOS as the stock returned -20% during the same time period and outperformed the market by an even larger margin.

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

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