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Were Hedge Funds Right About Souring On Arthur J. Gallagher & Co. (AJG) ?

Asma UL Husna

Legendary investors such as Jeffrey Talpins and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don't publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That's why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Arthur J. Gallagher & Co. (NYSE:AJG) from the perspective of those elite funds.

Is Arthur J. Gallagher & Co. (NYSE:AJG) undervalued? The smart money is becoming less confident. The number of bullish hedge fund positions went down by 4 recently. Our calculations also showed that AJG isn't among the 30 most popular stocks among hedge funds. AJG was in 22 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 26 hedge funds in our database with AJG holdings at the end of the previous quarter.

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Andreas Halvorsen

We're going to take a glance at the recent hedge fund action regarding Arthur J. Gallagher & Co. (NYSE:AJG).

What have hedge funds been doing with Arthur J. Gallagher & Co. (NYSE:AJG)?

At the end of the fourth quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AJG over the last 14 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

AJG_mar2019

When looking at the institutional investors followed by Insider Monkey, Viking Global, managed by Andreas Halvorsen, holds the most valuable position in Arthur J. Gallagher & Co. (NYSE:AJG). Viking Global has a $88.5 million position in the stock, comprising 0.5% of its 13F portfolio. The second largest stake is held by Balyasny Asset Management, managed by Dmitry Balyasny, which holds a $73 million position; 0.5% of its 13F portfolio is allocated to the stock. Other professional money managers that are bullish comprise Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Phill Gross and Robert Atchinson's Adage Capital Management and Cliff Asness's AQR Capital Management.

Since Arthur J. Gallagher & Co. (NYSE:AJG) has witnessed bearish sentiment from the smart money, it's easy to see that there exists a select few fund managers who sold off their full holdings last quarter. It's worth mentioning that Ken Griffin's Citadel Investment Group sold off the biggest investment of the 700 funds monitored by Insider Monkey, valued at about $22.3 million in stock. Daniel Johnson's fund, Gillson Capital, also said goodbye to its stock, about $17.8 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 4 funds last quarter.

Let's go over hedge fund activity in other stocks similar to Arthur J. Gallagher & Co. (NYSE:AJG). We will take a look at Incyte Corporation (NASDAQ:INCY), Nasdaq, Inc. (NASDAQ:NDAQ), HCP, Inc. (NYSE:HCP), and Cardinal Health, Inc. (NYSE:CAH). This group of stocks' market values are similar to AJG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position INCY,34,3042867,-3 NDAQ,21,206920,1 HCP,28,776595,3 CAH,35,927097,8 Average,29.5,1238370,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $1238 million. That figure was $278 million in AJG's case. Cardinal Health, Inc. (NYSE:CAH) is the most popular stock in this table. On the other hand Nasdaq, Inc. (NASDAQ:NDAQ) is the least popular one with only 21 bullish hedge fund positions. Arthur J. Gallagher & Co. (NYSE:AJG) 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately AJG wasn't in this group. Hedge funds that bet on AJG were disappointed as the stock returned 9.5% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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