Were Hedge Funds Right About Souring On Broadridge Financial Solutions, Inc. (BR)
You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund managers like Jeff Ubben, George Soros and Seth Klarman hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks.
Is Broadridge Financial Solutions, Inc. (NYSE:BR) undervalued? The smart money is taking a bearish view. The number of bullish hedge fund positions retreated by 11 in recent months. Our calculations also showed that BR isn't among the 30 most popular stocks among hedge funds.
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 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 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.
Let's view the latest hedge fund action surrounding Broadridge Financial Solutions, Inc. (NYSE:BR).
Hedge fund activity in Broadridge Financial Solutions, Inc. (NYSE:BR)
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 -33% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards BR over the last 14 quarters. With hedge funds' capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
The largest stake in Broadridge Financial Solutions, Inc. (NYSE:BR) was held by AQR Capital Management, which reported holding $199.2 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $113.4 million position. Other investors bullish on the company included Junto Capital Management, Renaissance Technologies, and Millennium Management.
Because Broadridge Financial Solutions, Inc. (NYSE:BR) has faced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there were a few funds that slashed their entire stakes heading into Q3. Intriguingly, Jeffrey Talpins's Element Capital Management dumped the biggest investment of the "upper crust" of funds monitored by Insider Monkey, valued at close to $16.2 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund said goodbye to about $14.6 million worth. These transactions are interesting, as total hedge fund interest fell by 11 funds heading into Q3.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Broadridge Financial Solutions, Inc. (NYSE:BR) but similarly valued. We will take a look at Equifax Inc. (NYSE:EFX), Copart, Inc. (NASDAQ:CPRT), Textron Inc. (NYSE:TXT), and E*TRADE Financial Corporation (NASDAQ:ETFC). All of these stocks' market caps are closest to BR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EFX,22,785153,-13 CPRT,28,273006,-3 TXT,28,580784,2 ETFC,41,1261771,5 Average,29.75,725179,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $725 million. That figure was $487 million in BR's case. E*TRADE Financial Corporation (NASDAQ:ETFC) is the most popular stock in this table. On the other hand Equifax Inc. (NYSE:EFX) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Broadridge Financial Solutions, Inc. (NYSE:BR) is even less popular than EFX. Considering that hedge funds aren't fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn't behind this stock. This isn't necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. 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 BR wasn't in this group. Hedge funds that bet on BR were disappointed as the stock returned 8% 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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