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Were Hedge Funds Right About Royal Bank of Canada (RY)?

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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Royal Bank of Canada (NYSE:RY) to find out whether there were any major changes in hedge funds' views.

Hedge fund interest in Royal Bank of Canada (NYSE:RY) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that RY isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). At the end of this article we will also compare RY to other stocks including Sony Corporation (NYSE:SNE), AstraZeneca plc (NYSE:AZN), and Starbucks Corporation (NASDAQ:SBUX) to get a better sense of its popularity.

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 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Rajiv Jain of GQG Partners
Rajiv Jain of GQG Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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. Now let's take a peek at the fresh hedge fund action surrounding Royal Bank of Canada (NYSE:RY).

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

At first quarter's end, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in RY over the last 23 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Is RY A Good Stock To Buy?
Is RY A Good Stock To Buy?

Among these funds, GQG Partners held the most valuable stake in Royal Bank of Canada (NYSE:RY), which was worth $390.6 million at the end of the fourth quarter. On the second spot was GLG Partners which amassed $108.6 million worth of shares. Marshall Wace LLP, Citadel Investment Group, and D E Shaw 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 Heathbridge Capital Management allocated the biggest weight to Royal Bank of Canada (NYSE:RY), around 3.35% of its 13F portfolio. GQG Partners is also relatively very bullish on the stock, setting aside 1.43 percent of its 13F equity portfolio to RY.

Since Royal Bank of Canada (NYSE:RY) has witnessed falling interest from the aggregate hedge fund industry, logic holds that there exists a select few money managers who were dropping their positions entirely in the first quarter. Intriguingly, Ken Griffin's Citadel Investment Group dropped the largest stake of the "upper crust" of funds monitored by Insider Monkey, worth about $23.3 million in stock. John Overdeck and David Siegel's fund, Two Sigma Advisors, also said goodbye to its stock, about $14.3 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's now take a look at hedge fund activity in other stocks similar to Royal Bank of Canada (NYSE:RY). These stocks are Sony Corporation (NYSE:SNE), AstraZeneca plc (NYSE:AZN), Starbucks Corporation (NASDAQ:SBUX), Caterpillar Inc. (NYSE:CAT), Anheuser-Busch InBev SA/NV (NYSE:BUD), Rio Tinto Group (NYSE:RIO), and Sanofi (NYSE:SNY). This group of stocks' market values are similar to RY's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SNE,27,541868,-1 AZN,34,2660857,-7 SBUX,61,4442448,-6 CAT,53,4956227,0 BUD,18,979916,0 RIO,25,1596509,-1 SNY,15,1142178,0 Average,33.3,2331429,-2.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $2331 million. That figure was $716 million in RY's case. Starbucks Corporation (NASDAQ:SBUX) is the most popular stock in this table. On the other hand Sanofi (NYSE:SNY) is the least popular one with only 15 bullish hedge fund positions. Royal Bank of Canada (NYSE:RY) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for RY is 35.3. 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 negative signal and 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 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately RY wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); RY investors were disappointed as the stock returned 10.4% since the end of March (through 7/23) 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 most of these stocks already outperformed the market in 2021.

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