American International Group Inc (AIG), Microsoft Corporation (MSFT), Citigroup Inc. (C): 3 Compelling Hedge-Fund-Favorite Stocks

A Banking Favorite Emerges

The 2012 list included three different banks: Citigroup (#6), JPMorgan (#9), and Bank of America (#19). In 2013, Bank of America fell out of the VIP list. Of the survivors, Citigroup Inc. (NYSE:C) rose two spots this year, while JPMorgan fell two.

This year, hedge funds prefer Citigroup Inc. (NYSE:C) over its peers. Over the last year, Citigroup has been the best-performing stock — with a gain of 95% compared to Bank of America’s 86% and JPMorgan’s 63% return during the same period.

Back during the recession, the financial index was the largest sector within the S&P 500. Since the financial industry doesn’t actually create anything, it is never good for it to be the largest sector in a developed economy.

Currently, the financial sector is the second-largest in the S&P 500, behind technology. Yet only three stocks total (including AIG) are included as top holdings. To me, this is encouraging for those invested in the sector; along with the value it presents, it shows that there is still a great deal of hedge fund money available to invest.

The banking industry is one of the most undervalued segments in the market. Sure, Citigroup Inc. (NYSE:C) is cheap and trades at just 80% of its book value per share. Yet Bank of America trades at just 65% of its book value per share – and the industry as a whole is still trading with large total loss since the recession in 2008.

Seeing as how the housing market has made a strong comeback, I would watch to see how long this trend lasts. Personally, I expect large banks to become more widely held. They are simply too cheap, have seen too many improvements, and are trading with too much momentum to see such a lack of ownership.

Final Thoughts

Hedge funds don’t always get it right, but as we see which stocks have risen and fallen it should be easy to determine gains and losses that have been created from hedge fund activity.

While American International Group Inc (NYSE:AIG) and Citigroup Inc. (NYSE:C) have seen gains with increased hedge fund buying pressure — Microsoft Corporation (NASDAQ:MSFT), JPMorgan, and Bank of America have seen large moves higher with a drop in hedge fund presence. This is encouraging, indicating that there is still upside potential and available money on the hedge fund table.

The process of comparing stock performance to year-over-year positioning should be telling. You can see where gains/losses have been created, then use it to determine future upside.

The article 3 Compelling Hedge-Fund-Favorite Stocks originally appeared on Fool.com and is written by Brian Nichols.

Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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