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In this article we are going to use hedge fund sentiment as a tool and determine whether Aegon N.V. (NYSE:AEG) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is Aegon N.V. (NYSE:AEG) a healthy stock for your portfolio? Prominent investors were in a pessimistic mood. The number of bullish hedge fund positions fell by 1 in recent months. Aegon N.V. (NYSE:AEG) was in 3 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 11. Our calculations also showed that AEG isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
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 66 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.
Gavin Saitowitz of Prelude Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. 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. Now we're going to take a look at the fresh hedge fund action encompassing Aegon N.V. (NYSE:AEG).
What have hedge funds been doing with Aegon N.V. (NYSE:AEG)?
At third quarter's end, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the previous quarter. By comparison, 7 hedge funds held shares or bullish call options in AEG a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
More specifically, Arrowstreet Capital was the largest shareholder of Aegon N.V. (NYSE:AEG), with a stake worth $10.5 million reported as of the end of September. Trailing Arrowstreet Capital was Millennium Management, which amassed a stake valued at $0.9 million. Two Sigma Advisors was also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Arrowstreet Capital allocated the biggest weight to Aegon N.V. (NYSE:AEG), around 0.02% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, earmarking 0.0014 percent of its 13F equity portfolio to AEG.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified AEG as a viable investment and initiated a position in the stock.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Aegon N.V. (NYSE:AEG) but similarly valued. We will take a look at Allogene Therapeutics, Inc. (NASDAQ:ALLO), Hyatt Hotels Corporation (NYSE:H), Invesco Ltd. (NYSE:IVZ), First Horizon National Corporation (NYSE:FHN), Axalta Coating Systems Ltd (NYSE:AXTA), MSA Safety Incorporated (NYSE:MSA), and Lithia Motors Inc (NYSE:LAD). All of these stocks' market caps match AEG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALLO,21,248617,-3 H,26,574829,-1 IVZ,21,600095,-1 FHN,30,378810,-5 AXTA,45,1220833,-2 MSA,14,18753,-12 LAD,49,1149267,18 Average,29.4,598743,-0.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.4 hedge funds with bullish positions and the average amount invested in these stocks was $599 million. That figure was $12 million in AEG's case. Lithia Motors Inc (NYSE:LAD) is the most popular stock in this table. On the other hand MSA Safety Incorporated (NYSE:MSA) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Aegon N.V. (NYSE:AEG) is even less popular than MSA. Our overall hedge fund sentiment score for AEG is 12.2. 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. Hedge funds clearly dropped the ball on AEG as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 28.1% in 2020 through November 23rd and still beat the market by 15.4 percentage points. A small number of hedge funds were also right about betting on AEG as the stock returned 39.8% since Q3 (through November 23rd) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.