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Were Hedge Funds Right About Dumping Hanover Insurance Group, Inc. (THG)?

Asma UL Husna

Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. At Insider Monkey, we pore over the filings of nearly 835 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we've gathered as a result gives us access to a wealth of collective knowledge based on these firms' portfolio holdings as of December 31. In this article, we will use that wealth of knowledge to determine whether or not The Hanover Insurance Group, Inc. (NYSE:THG) makes for a good investment right now.

The Hanover Insurance Group, Inc. (NYSE:THG) shareholders have witnessed a decrease in support from the world's most elite money managers of late. THG was in 21 hedge funds' portfolios at the end of December. There were 28 hedge funds in our database with THG positions at the end of the previous quarter. Our calculations also showed that THG 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).

Today there are a multitude of formulas investors employ to size up stocks. Some of the most useful formulas are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the top picks of the best investment managers can outclass the S&P 500 by a very impressive amount (see the details here).

[caption id="attachment_189632" align="aligncenter" width="399"] 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 view the new hedge fund action encompassing The Hanover Insurance Group, Inc. (NYSE:THG).

What does smart money think about The Hanover Insurance Group, Inc. (NYSE:THG)?

At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards THG over the last 18 quarters. With the smart money's capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in The Hanover Insurance Group, Inc. (NYSE:THG), which was worth $63 million at the end of the third quarter. On the second spot was Pzena Investment Management which amassed $32 million worth of shares. Two Sigma Advisors, Winton Capital Management, and Gillson Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Prospector Partners allocated the biggest weight to The Hanover Insurance Group, Inc. (NYSE:THG), around 1.82% of its 13F portfolio. Gillson Capital is also relatively very bullish on the stock, dishing out 1.7 percent of its 13F equity portfolio to THG.

Because The Hanover Insurance Group, Inc. (NYSE:THG) has experienced falling interest from the aggregate hedge fund industry, logic holds that there were a few fund managers that slashed their positions entirely last quarter. It's worth mentioning that Ken Griffin's Citadel Investment Group dumped the biggest position of the 750 funds tracked by Insider Monkey, worth an estimated $33.3 million in stock. Ian Simm's fund, Impax Asset Management, also said goodbye to its stock, about $7.3 million worth. These transactions are interesting, as total hedge fund interest dropped by 7 funds last quarter.

Let's check out hedge fund activity in other stocks similar to The Hanover Insurance Group, Inc. (NYSE:THG). These stocks are IDACORP Inc (NYSE:IDA), Amedisys Inc (NASDAQ:AMED), Hanesbrands Inc. (NYSE:HBI), and Kirby Corporation (NYSE:KEX). This group of stocks' market caps are closest to THG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IDA,24,342667,3 AMED,22,219759,0 HBI,40,736481,6 KEX,26,711162,5 Average,28,502517,3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $503 million. That figure was $225 million in THG's case. Hanesbrands Inc. (NYSE:HBI) is the most popular stock in this table. On the other hand Amedisys Inc (NASDAQ:AMED) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks The Hanover Insurance Group, Inc. (NYSE:THG) is even less popular than AMED. Hedge funds dodged a bullet by taking a bearish stance towards THG. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but managed to beat the market by 5.5 percentage points. Unfortunately THG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); THG investors were disappointed as the stock returned -32.3% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in Q1. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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