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Were Hedge Funds Right About Souring On General Electric Company (GE)?

Reymerlyn Martin
·6 min read

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 823 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about General Electric Company (NYSE:GE) in this article.

Is General Electric Company (NYSE:GE) a buy right now? Hedge funds were getting less optimistic. The number of bullish hedge fund bets were trimmed by 1 recently. General Electric Company (NYSE:GE) was in 57 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 74. Our calculations also showed that GE 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 58 hedge funds in our database with GE positions at the end of the first quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.

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 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 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 stocks that are in our short portfolio.

TRIAN PARTNERS
TRIAN PARTNERS

Nelson Peltz of Trian Partners

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 review the key hedge fund action surrounding General Electric Company (NYSE:GE).

How are hedge funds trading General Electric Company (NYSE:GE)?

At Q2's end, a total of 57 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in GE over the last 20 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in General Electric Company (NYSE:GE) was held by Eagle Capital Management, which reported holding $948.4 million worth of stock at the end of September. It was followed by Pzena Investment Management with a $512.1 million position. Other investors bullish on the company included Trian Partners, Arrowstreet Capital, and Platinum Asset Management. In terms of the portfolio weights assigned to each position Trian Partners allocated the biggest weight to General Electric Company (NYSE:GE), around 8.4% of its 13F portfolio. Southeastern Asset Management is also relatively very bullish on the stock, designating 5.69 percent of its 13F equity portfolio to GE.

Because General Electric Company (NYSE:GE) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of money managers that slashed their entire stakes last quarter. At the top of the heap, Scott Bessent's Key Square Capital Management sold off the largest position of the 750 funds tracked by Insider Monkey, comprising an estimated $19.3 million in stock. Mike Masters's fund, Masters Capital Management, also sold off its stock, about $15.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 1 funds last quarter.

Let's go over hedge fund activity in other stocks similar to General Electric Company (NYSE:GE). We will take a look at NetEase, Inc (NASDAQ:NTES), Duke Energy Corporation (NYSE:DUK), Activision Blizzard, Inc. (NASDAQ:ATVI), CME Group Inc (NASDAQ:CME), Micron Technology, Inc. (NASDAQ:MU), Chubb Limited (NYSE:CB), and Ecolab Inc. (NYSE:ECL). All of these stocks' market caps are closest to GE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NTES,38,4594320,-1 DUK,33,906929,-2 ATVI,97,3564560,-4 CME,60,2336649,-2 MU,84,4285777,-10 CB,40,1288157,7 ECL,46,2099678,8 Average,56.9,2725153,-0.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 56.9 hedge funds with bullish positions and the average amount invested in these stocks was $2725 million. That figure was $3186 million in GE's case. Activision Blizzard, Inc. (NASDAQ:ATVI) is the most popular stock in this table. On the other hand Duke Energy Corporation (NYSE:DUK) is the least popular one with only 33 bullish hedge fund positions. General Electric Company (NYSE:GE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for GE is 45.9. 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 GE wasn't nearly as popular as these 10 stocks and hedge funds that were betting on GE were disappointed as the stock returned 6.9% 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 General Electric Co (NYSE:GE)

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

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