Are Top Investors Right to be Bearish on Prudential Financial Inc (PRU)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed over the past few years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that hedge funds do have great stock picking skills, so let’s take a glance at the smart money sentiment towards Prudential Financial Inc (NYSE:PRU).

Prudential Financial Inc (NYSE:PRU) was in 28 hedge funds’ portfolios at the end of September. PRU shareholders have witnessed a decrease in hedge fund sentiment recently. There were 35 hedge funds in our database with PRU positions at the end of the previous quarter. At the end of this article we will also compare PRU to other stocks including Liberty Global PLC LiLAC Class C (NASDAQ:LILAK), Air Products & Chemicals, Inc. (NYSE:APD), and Wipro Limited (ADR) (NYSE:WIT) to get a better sense of its popularity.

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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Keeping this in mind, let’s take a gander at the fresh action surrounding Prudential Financial Inc (NYSE:PRU).

What have hedge funds been doing with Prudential Financial Inc (NYSE:PRU)?

At the end of the third quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a 20% decline from the previous quarter. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital has the most valuable position in Prudential Financial Inc (NYSE:PRU), worth close to $162.6 million. On Arrowstreet Capital’s heels is AQR Capital Management, led by Cliff Asness, holding a $109.4 million position. Other hedge funds and institutional investors that are bullish contain Mike Masters’ Masters Capital Management, Phill Gross and Robert Atchinson’s Adage Capital Management and David Harding’s Winton Capital Management.

Since Prudential Financial Inc (NYSE:PRU) has faced falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of fund managers that elected to cut their entire stakes heading into Q4. Intriguingly, Martin D. Sass’ MD Sass sold off the biggest position of all the hedgies followed by Insider Monkey, totaling about $25.5 million in call options, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund dropped about $17.3 million worth of shares. These moves are interesting, as aggregate hedge fund interest dropped by 7 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Prudential Financial Inc (NYSE:PRU). These stocks are Liberty Global PLC LiLAC Class C (NASDAQ:LILAK), Air Products & Chemicals, Inc. (NYSE:APD), Wipro Limited (ADR) (NYSE:WIT), and Liberty Global PLC LiLAC Class A (NASDAQ:LILA). This group of stocks’ market values match PRU’s market value.

As you can see these stocks had an average of 36.5 hedge funds with bullish positions and the average amount invested in these stocks was $1.43 billion. That figure was $520 million in PRU’s case. Air Products & Chemicals, Inc. (NYSE:APD) is the most popular stock in this table. On the other hand Wipro Limited (ADR) (NYSE:WIT) is the least popular one with only 8 bullish hedge fund positions. Prudential Financial Inc (NYSE:PRU) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard APD might be a better candidate to consider a long position in.

Disclosure: None