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Were Hedge Funds Right About Piling Into Moody’s Corporation (MCO)?

Reymerlyn Martin
·6 min read

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Moody's Corporation (NYSE:MCO)? The smart money sentiment can provide an answer to this question.

Is Moody's Corporation (NYSE:MCO) a buy right now? Money managers were getting more optimistic. The number of long hedge fund positions moved up by 11 in recent months. Moody's Corporation (NYSE:MCO) was in 61 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 55. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that MCO 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). There were 50 hedge funds in our database with MCO positions at the end of the first quarter. 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Andreas Halvorsen
Andreas Halvorsen

Andreas Halvorsen of Viking Global

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 we're going to take a look at the fresh hedge fund action regarding Moody's Corporation (NYSE:MCO).

Hedge fund activity in Moody's Corporation (NYSE:MCO)

At the end of June, a total of 61 of the hedge funds tracked by Insider Monkey were long this stock, a change of 22% from the previous quarter. On the other hand, there were a total of 39 hedge funds with a bullish position in MCO a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Berkshire Hathaway was the largest shareholder of Moody's Corporation (NYSE:MCO), with a stake worth $6777.5 million reported as of the end of September. Trailing Berkshire Hathaway was Akre Capital Management, which amassed a stake valued at $1548.5 million. Viking Global, AltaRock Partners, and Windacre Partnership 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 Rings Capital Management allocated the biggest weight to Moody's Corporation (NYSE:MCO), around 37.76% of its 13F portfolio. Valley Forge Capital is also relatively very bullish on the stock, designating 19.02 percent of its 13F equity portfolio to MCO.

As industrywide interest jumped, specific money managers have been driving this bullishness. Viking Global, managed by Andreas Halvorsen, established the most outsized position in Moody's Corporation (NYSE:MCO). Viking Global had $268.5 million invested in the company at the end of the quarter. Doug Silverman and Alexander Klabin's Senator Investment Group also made a $68.7 million investment in the stock during the quarter. The other funds with new positions in the stock are James Parsons's Junto Capital Management, Peter Simmie's Bristol Gate Capital Partners, and Peter Seuss's Prana Capital Management.

Let's check out hedge fund activity in other stocks similar to Moody's Corporation (NYSE:MCO). These stocks are Humana Inc (NYSE:HUM), Northrop Grumman Corporation (NYSE:NOC), Global Payments Inc (NYSE:GPN), Sea Limited (NYSE:SE), Truist Financial Corporation (NYSE:TFC), CNOOC Limited (NYSE:CEO), and Boston Scientific Corporation (NYSE:BSX). All of these stocks' market caps match MCO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HUM,73,4697967,3 NOC,47,990004,2 GPN,66,3311740,-1 SE,82,6358325,6 TFC,33,287639,-1 CEO,13,166646,2 BSX,66,2312667,7 Average,54.3,2589284,2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 54.3 hedge funds with bullish positions and the average amount invested in these stocks was $2589 million. That figure was $10771 million in MCO's case. Sea Limited (NYSE:SE) is the most popular stock in this table. On the other hand CNOOC Limited (NYSE:CEO) is the least popular one with only 13 bullish hedge fund positions. Moody's Corporation (NYSE:MCO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MCO is 74.8. 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 MCO wasn't nearly as popular as these 10 stocks and hedge funds that were betting on MCO were disappointed as the stock returned 5.4% 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.

Get real-time email alerts: Follow Moodys Corp (NYSE:MCO)

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

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