Battered by Brexit: How Hedge Funds’ Favorite Finance Stocks Performed in Q2

The UK’s electorate decision to leave the European Union in late-June came as a shock for many market participants and led to an immediate bloodbath in the financial markets. While there were several investors who were prepared for that outcome, what took a lot of people by surprise was how quickly the markets bounced back after that initial meltdown. Most indices and stocks around the world managed to end the second quarter at nearly the same levels at which they were trading before the Brexit result was announced. The few stocks that bucked that trend were largely from the financial sector, which was also the space that saw the maximum damage after the Brexit decision was announced. In this post we will take a look at the five most popular financial stocks among the hedge funds covered by Insider Monkey at the end of the first quarter and analyze their respective performance during the second quarter.

At Insider Monkey, we track around 765 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

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#5. Wells Fargo & Co (NYSE:WFC)

 – Hedge Funds with Long Positions (as of March 31): 90

 – Aggregate Value of Hedge Funds’ Holdings (as of March 31): $29.76 Billion

Let’s start with Wells Fargo & Co (NYSE:WFC), which is the only stock in this list that saw an increase in its ownership among the hedge funds in our database during the first quarter, to 90 from 85. However, the aggregate value of hedge funds’ holdings in the company fell by $2.79 billion during that period. Shares of the largest bank holding company in the U.S ended the second quarter down by 2.13% and are currently trading down by 11% year-to-date. On the bright side, the decline has helped increase the stock’s annual dividend yield to 3.15%. Wells Fargo & Co (NYSE:WFC) reported its second quarter results on July 14, which amounted to EPS of $1.01 on revenue of $22.22 billion, exactly matching the Street’s projections. However, the figures were down year-over-year from EPS of $1.03 on revenue of $21.32 billion. Most analysts who track the stock feel that it is undervalued at current levels, especially when one takes into account that Wells Fargo & Co is among the few banking companies that has been able to grow its revenue during the past few years. Alex Snow‘s Lansdowne Partners more than doubled its stake in the company to 20.47 million shares during the first quarter.

#4. American International Group Inc (NYSE:AIG)

 – Hedge Funds with Long Positions (as of March 31): 94

 – Aggregate Value of Hedge Funds’ Holdings (as of March 31): $8.4 Billion

Shares of American International Group Inc (NYSE:AIG) performed well during the first two months of the second quarter, but owing to the heavy decline last month they ended the quarter with a loss of 2.15%. Several analysts feel that the 12% decline that the stock has suffered this year will prove beneficial for long-term shareholders as it will allow the insurance major to retire more of its common stock under its $25 billion buyback program. Another reason analysts are confident that shareholders’ value will increase going forward is the recent appointment of activist investors Samuel Merksamer, managing director at Carl Icahn‘s Icahn Capital LP, and billionaire John Paulson of Paulson & Co., to its Board of Directors. On July 6, analysts at Evercore ISI initiated coverage on American International Group Inc (NYSE:AIG)’s stock with a ‘Buy’ rating and $62 price target. With ownership of over 44.42 million shares of AIG, Icahn Capital LP was the largest shareholder of the stock in our database on March 31.

We’ll check out the second quarter performance of hedgies top-3 finance stock picks on the next page.

#3. JPMorgan Chase & Co. (NYSE:JPM)

 – Hedge Funds with Long Positions (as of March 31): 97

 – Aggregate Value of Hedge Funds’ Holdings (as of March 31): $6.93 Billion

Moving on, JPMorgan Chase & Co. (NYSE:JPM)’s stock has suffered the smallest year-to-date decline among the stocks covered in this list, being down by 3%, which can be partially attributed to the 5% gain the stock registered during the second quarter. The investment bank generates a large amount of its income in the U.K. and is currently considering moving thousands of its employees out of the country if the U.K. loses its ‘Passport rule’ (the right to buy and sell securities in the EU) due to the Brexit outcome. JPMorgan Chase & Co. (NYSE:JPM) reported its second quarter results on the same day as Wells Fargo, announcing EPS of $1.55 on revenue of $25.2 billion for the quarter, topping the consensus estimates of EPS of $1.44 on revenue of $24.14 billion. Funds that increased their holdings in the company during the first quarter included Boykin Curry‘s Eagle Capital Management, which upped its stake by 6% to 13.28 million shares.

#2. Citigroup Inc (NYSE:C)

 – Hedge Funds with Long Positions (as of March 31): 104

 – Aggregate Value of Hedge Funds’ Holdings (as of March 31): $8.03 Billion

Amid an almost 20% drop in Citigroup Inc (NYSE:C)’s stock during the first quarter, the number of hedge funds in our system with long positions in the stock declined by two and the aggregate value of their holdings in it fell by $1.94 billion. Though shares of Citigroup Inc (NYSE:C) managed to end the second quarter with a meager gain of 1.53%, it is still trading down by over 14% year-to-date. According to several analysts, the stock is a good bargain at current levels as it is currently trading at a trailing P/E of 9.33, which is considerably lower than its 5-year historical average trailing P/E of 14.32. On July 7, Reuters reported that the company is merging its consumer banking unit in Europe, Middle East and Africa (EMEA) with its consumer banking unit in Asia. Over the last few years, Citigroup has shut down its consumer banking operations in several countries, limiting its operations to 19 countries around the world. Seth Klarman‘s Baupost Group made no change to its stake of 102.55 million Citigroup shares during the first quarter.

#1. Bank of America Corp (NYSE:BAC)

 – Hedge Funds with Long Positions (as of March 31): 110

 – Aggregate Value of Hedge Funds’ Holdings (as of March 31): $5.52 Billion

Even though its ownership among the hedge funds in our system dropped by three and the aggregate value of their holdings in it fell by 18.8% during the first quarter, Bank of America Corp (NYSE:BAC) continued to remain the most popular financial stock among them as of March 31. Shares of the bank holding company ended the second quarter down by 1.85% and have lost almost 15% of their value so far in 2016. On July 7, analysts at Raymond Jones released a note in which they downgraded Bank of America Corp (NYSE:BAC) to ‘Market Perform’ from ‘Outperform’, citing concerns over the maturity of the credit cycle, the challenges faced by the bank’s investment banking unit, as well as the new accounting rule FAS 91, which will negatively impact Bank of America’s earnings going forward. The stock currently sports an average rating of ‘Overweight’ and an average price target of $17.31 from the 33 leading analysts and research firms on Wall Street who track it, with the average price target suggesting upside potential of 20%. Patrick Degorce‘s Theleme Partners was one of the hedge funds that initiated a stake in Bank of America Corp during the first quarter, purchasing 6.88 million shares of the company.

Disclosure: None