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Were Hedge Funds Right About Capital One Financial Corp. (COF)?

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  • COF-PJ

Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 900 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Capital One Financial Corp. (NYSE:COF), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Capital One Financial Corp. (NYSE:COF) investors should be aware of an increase in support from the world's most elite money managers in recent months. Capital One Financial Corp. (NYSE:COF) was in 64 hedge funds' portfolios at the end of June. The all time high for this statistic was previously 59. This means the bullish number of hedge fund positions in this stock currently sits at its new all time high. There were 59 hedge funds in our database with COF positions at the end of the first quarter. Our calculations also showed that COF 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.


Boykin Curry of Eagle Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium 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 analyze the key hedge fund action encompassing Capital One Financial Corp. (NYSE:COF).

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

At Q2's end, a total of 64 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the first quarter of 2020. On the other hand, there were a total of 55 hedge funds with a bullish position in COF a year ago. With hedge funds' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Is COF A Good Stock To Buy?
Is COF A Good Stock To Buy?

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Pzena Investment Management, managed by Richard S. Pzena, holds the largest position in Capital One Financial Corp. (NYSE:COF). Pzena Investment Management has a $699.6 million position in the stock, comprising 2.7% of its 13F portfolio. Sitting at the No. 2 spot is Fisher Asset Management, led by Ken Fisher, holding a $620.8 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish comprise Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Boykin Curry's Eagle Capital Management and Brandon Haley's Holocene Advisors. In terms of the portfolio weights assigned to each position East Side Capital (RR Partners) allocated the biggest weight to Capital One Financial Corp. (NYSE:COF), around 10.72% of its 13F portfolio. Strycker View Capital is also relatively very bullish on the stock, earmarking 5.22 percent of its 13F equity portfolio to COF.

Consequently, specific money managers were leading the bulls' herd. East Side Capital (RR Partners), managed by Steven Richman, established the most valuable position in Capital One Financial Corp. (NYSE:COF). East Side Capital (RR Partners) had $99.6 million invested in the company at the end of the quarter. Michael A. Price and Amos Meron's Empyrean Capital Partners also initiated a $30 million position during the quarter. The other funds with new positions in the stock are Louis Bacon's Moore Global Investments, Daniel Johnson's Gillson Capital, and Usman Waheed's Strycker View Capital.

Let's go over hedge fund activity in other stocks similar to Capital One Financial Corp. (NYSE:COF). These stocks are Illumina, Inc. (NASDAQ:ILMN), Equinor ASA (NYSE:EQNR), Colgate-Palmolive Company (NYSE:CL), The Blackstone Group Inc. (NYSE:BX), HCA Healthcare Inc (NYSE:HCA), ABB Ltd (NYSE:ABB), and Twilio Inc. (NYSE:TWLO). This group of stocks' market caps are similar to COF's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ILMN,51,1973287,-1 EQNR,11,88633,3 CL,58,2368869,10 BX,54,2080104,5 HCA,60,2695782,-2 ABB,15,658036,4 TWLO,98,7891057,-1 Average,49.6,2536538,2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 49.6 hedge funds with bullish positions and the average amount invested in these stocks was $2537 million. That figure was $4054 million in COF's case. Twilio Inc. (NYSE:TWLO) is the most popular stock in this table. On the other hand Equinor ASA (NYSE:EQNR) is the least popular one with only 11 bullish hedge fund positions. Capital One Financial Corp. (NYSE:COF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for COF is 70.5. 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 positive signal but 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 26.3% in 2021 through October 29th and beat the market again by 2.3 percentage points. Unfortunately COF wasn't nearly as popular as these 5 stocks and hedge funds that were betting on COF were disappointed as the stock returned -1.6% since the end of June (through 10/29) 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 many of these stocks already outperformed the market since 2019.

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