Are Hedge Funds Losing Their Interest in Legg Mason Inc (LM)?

Looking for high-potential stocks? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 7.6% in the 12 months ending November 21, with more than 51% of the stocks in the index failing to beat the benchmark. Therefore, the odds that one will pin down a winner by randomly picking a stock are less than the odds in a fair coin-tossing game. Conversely, best performing hedge funds’ 30 preferred mid-cap stocks generated a return of 18% during the same 12-month period. Coincidence? It might happen to be so, but it is unlikely. Our research covering a 17-year period indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Legg Mason Inc (NYSE:LM).

Is Legg Mason Inc (NYSE:LM) ready to rally soon? The smart money is getting less optimistic, judging by the fact that among the funds in our database, the number of investors bullish on LM declined by six to 26 during the third quarter. However, the level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Corelogic Inc (NYSE:CLGX), Nabors Industries Ltd. (NYSE:NBR), and PRA Health Sciences Inc (NASDAQ:PRAH) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Now, let’s review the latest action surrounding Legg Mason Inc (NYSE:LM).

What have hedge funds been doing with Legg Mason Inc (NYSE:LM)?

At the end of the third quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, down by 19% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards LM over the last five quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC holds the largest position in Legg Mason Inc (NYSE:LM). First Pacific Advisors LLC has a $134.4 million position in the stock, comprising 1.1% of its 13F portfolio. Sitting at the No. 2 spot is GAMCO Investors, led by Mario Gabelli, which holds a $125 million position; the fund has 0.8% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish consist of James Parsons’ Junto Capital Management, Israel Englander’s Millennium Management, and D. E. Shaw’s D E Shaw. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Seeing as Legg Mason Inc (NYSE:LM) has weathered falling interest from the entirety of the hedge funds we track, it’s easy to see that there were a few money managers that elected to cut their full holdings during the third quarter. Interestingly, Anand Parekh’s Alyeska Investment Group said goodbye to the largest investment of the 700 funds tracked by Insider Monkey, worth about $7.6 million in stock. John D. Gillespie’s fund, Prospector Partners, also dropped its stock, about $5.6 million worth.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Legg Mason Inc(NYSE:LM) but similarly valued. We will take a look at Corelogic Inc (NYSE:CLGX), Nabors Industries Ltd. (NYSE:NBR), PRA Health Sciences Inc (NASDAQ:PRAH), and Akorn, Inc. (NASDAQ:AKRX). This group of stocks’ market valuations match LM’s market valuation.

As you can see these stocks had an average of 25 funds with bullish positions and the average amount invested in these stocks was $392 million. That figure was $516 million in LM’s case. Nabors Industries Ltd. (NYSE:NBR) is the most popular stock in this table. On the other hand Corelogic Inc (NYSE:CLGX) is the least popular one with only 19 bullish hedge fund positions. Legg Mason Inc (NYSE:LM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard Nabors Industries Ltd. (NYSE:NBR) might be a better candidate to consider taking a long position in.

Disclosure: none