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Were Hedge Funds Right About Goldman Sachs Group, Inc. (GS)?

Debasis Saha
·6 min read

In this article we will take a look at whether hedge funds think Goldman Sachs Group, Inc. (NYSE:GS) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Goldman Sachs Group, Inc. (NYSE:GS) a buy here? Prominent investors were taking a pessimistic view. The number of bullish hedge fund bets fell by 5 lately. Goldman Sachs Group, Inc. (NYSE:GS) was in 69 hedge funds' portfolios at the end of June. The all time high for this statistics is 78. Our calculations also showed that GS isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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.

Warren Buffett of Berkshire Hathaway

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Now let's check out the key hedge fund action encompassing Goldman Sachs Group, Inc. (NYSE:GS).

What have hedge funds been doing with Goldman Sachs Group, Inc. (NYSE:GS)?

Heading into the third quarter of 2020, a total of 69 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the first quarter of 2020. By comparison, 61 hedge funds held shares or bullish call options in GS a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is GS A Good Stock To Buy?
Is GS A Good Stock To Buy?

More specifically, Eagle Capital Management was the largest shareholder of Goldman Sachs Group, Inc. (NYSE:GS), with a stake worth $1173 million reported as of the end of September. Trailing Eagle Capital Management was Greenhaven Associates, which amassed a stake valued at $582.5 million. Fisher Asset Management, Citadel Investment Group, and Pzena Investment Management 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 Tegean Capital Management allocated the biggest weight to Goldman Sachs Group, Inc. (NYSE:GS), around 28.39% of its 13F portfolio. Greenhaven Associates is also relatively very bullish on the stock, designating 12.9 percent of its 13F equity portfolio to GS.

Seeing as Goldman Sachs Group, Inc. (NYSE:GS) has faced declining sentiment from the smart money, it's easy to see that there was a specific group of fund managers who sold off their entire stakes in the second quarter. At the top of the heap, Warren Buffett's Berkshire Hathaway sold off the largest investment of the 750 funds watched by Insider Monkey, comprising an estimated $296.8 million in stock. Renaissance Technologies, also cut its stock, about $86.8 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds in the second quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Goldman Sachs Group, Inc. (NYSE:GS) but similarly valued. We will take a look at The Estee Lauder Companies Inc (NYSE:EL), The Blackstone Group Inc. (NYSE:BX), Stryker Corporation (NYSE:SYK), Intuitive Surgical, Inc. (NASDAQ:ISRG), Anthem Inc (NYSE:ANTM), Fiserv, Inc. (NASDAQ:FISV), and Booking Holdings Inc. (NASDAQ:BKNG). This group of stocks' market valuations resemble GS's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EL,46,1197830,2 BX,47,1434341,-2 SYK,50,1257094,2 ISRG,43,1094503,-7 ANTM,69,4103137,-1 FISV,85,4642685,18 BKNG,96,6098595,6 Average,62.3,2832598,2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 62.3 hedge funds with bullish positions and the average amount invested in these stocks was $2833 million. That figure was $3543 million in GS's case. Booking Holdings Inc. (NASDAQ:BKNG) is the most popular stock in this table. On the other hand Intuitive Surgical, Inc. (NASDAQ:ISRG) is the least popular one with only 43 bullish hedge fund positions. Goldman Sachs Group, Inc. (NYSE:GS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for GS is 51.1. 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 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 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately GS wasn't nearly as popular as these 10 stocks and hedge funds that were betting on GS were disappointed as the stock returned 5% since the end of June (through 10/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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