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Were Hedge Funds Right About TransDigm Group Incorporated (TDG) ?

Asma UL Husna

Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the second quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 6.6 percentage points through May 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.

Is TransDigm Group Incorporated (NYSE:TDG) ready to rally soon? Hedge funds are turning bullish. The number of bullish hedge fund positions went up by 5 lately. Our calculations also showed that TDG isn't among the 30 most popular stocks among hedge funds. TDG was in 52 hedge funds' portfolios at the end of March. There were 47 hedge funds in our database with TDG positions 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' 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.

Lone Pine Capital 2015 Q2 Investor Letter

We're going to take a gander at the fresh hedge fund action surrounding TransDigm Group Incorporated (NYSE:TDG).

How have hedgies been trading TransDigm Group Incorporated (NYSE:TDG)?

At Q1's end, a total of 52 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TDG over the last 15 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

TDG_june2019

More specifically, Tiger Global Management was the largest shareholder of TransDigm Group Incorporated (NYSE:TDG), with a stake worth $937.9 million reported as of the end of March. Trailing Tiger Global Management was Lone Pine Capital, which amassed a stake valued at $754.2 million. Stockbridge Partners, Windacre Partnership, and AltaRock Partners were also very fond of the stock, giving the stock large weights in their portfolios.

As aggregate interest increased, key hedge funds were leading the bulls' herd. Alkeon Capital Management, managed by Panayotis Takis Sparaggis, established the most outsized position in TransDigm Group Incorporated (NYSE:TDG). Alkeon Capital Management had $107.7 million invested in the company at the end of the quarter. James Crichton's Hitchwood Capital Management also initiated a $72.6 million position during the quarter. The other funds with new positions in the stock are Edward Goodnow's Goodnow Investment Group, Zach Schreiber's Point State Capital, and Alexander Mitchell's Scopus Asset Management.

Let's go over hedge fund activity in other stocks similar to TransDigm Group Incorporated (NYSE:TDG). We will take a look at Royal Caribbean Cruises Ltd. (NYSE:RCL), Hormel Foods Corporation (NYSE:HRL), The Hershey Company (NYSE:HSY), and Wipro Limited (NYSE:WIT). This group of stocks' market caps resemble TDG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RCL,47,1572558,-5 HRL,15,138242,-3 HSY,22,541491,-11 WIT,11,106818,1 Average,23.75,589777,-4.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $590 million. That figure was $4684 million in TDG's case. Royal Caribbean Cruises Ltd. (NYSE:RCL) is the most popular stock in this table. On the other hand Wipro Limited (NYSE:WIT) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks TransDigm Group Incorporated (NYSE:TDG) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on TDG, though not to the same extent, as the stock returned -0.7% during the same period and outperformed the market as well.

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

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