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Were Hedge Funds Right About Selling AFLAC Incorporated (AFL)?

Nina Todic

Is AFLAC Incorporated (NYSE:AFL) 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, 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.

AFLAC Incorporated (NYSE:AFL) was in 23 hedge funds' portfolios at the end of June. AFL investors should be aware of a decrease in support from the world's most elite money managers recently. There were 30 hedge funds in our database with AFL positions at the end of the previous quarter. Our calculations also showed that AFL isn't among the 30 most popular stocks among hedge funds (see the video at the end of this article).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

John Rogers Ariel Investments

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the key hedge fund action encompassing AFLAC Incorporated (NYSE:AFL).

What have hedge funds been doing with AFLAC Incorporated (NYSE:AFL)?

Heading into the third quarter of 2019, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -23% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AFL over the last 16 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with AFL Positions

More specifically, AQR Capital Management was the largest shareholder of AFLAC Incorporated (NYSE:AFL), with a stake worth $486.5 million reported as of the end of March. Trailing AQR Capital Management was Ariel Investments, which amassed a stake valued at $88.3 million. Citadel Investment Group, Adage Capital Management, and GLG Partners were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as AFLAC Incorporated (NYSE:AFL) has witnessed a decline in interest from the aggregate hedge fund industry, it's easy to see that there exists a select few money managers that slashed their full holdings last quarter. Intriguingly, Daniel Johnson's Gillson Capital cut the largest stake of the 750 funds monitored by Insider Monkey, valued at about $16.6 million in stock, and Steve Cohen's Point72 Asset Management was right behind this move, as the fund dropped about $12 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 7 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as AFLAC Incorporated (NYSE:AFL) but similarly valued. We will take a look at Keurig Dr Pepper Inc. (NYSE:KDP), Applied Materials, Inc. (NASDAQ:AMAT), Baidu, Inc. (NASDAQ:BIDU), and Baxter International Inc. (NYSE:BAX). All of these stocks' market caps are closest to AFL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KDP,21,699540,-1 AMAT,44,1996991,2 BIDU,44,1822939,-9 BAX,34,2818359,4 Average,35.75,1834457,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.75 hedge funds with bullish positions and the average amount invested in these stocks was $1834 million. That figure was $727 million in AFL's case. Applied Materials, Inc. (NASDAQ:AMAT) is the most popular stock in this table. On the other hand Keurig Dr Pepper Inc. (NYSE:KDP) is the least popular one with only 21 bullish hedge fund positions. AFLAC Incorporated (NYSE:AFL) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AFL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AFL investors were disappointed as the stock returned -4.1% during the third quarter 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 many of these stocks already outperformed the market so far in 2019. 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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