Brown & Brown, Inc. (BRO): Hedge Funds Taking Some Chips Off The Table

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Brown & Brown, Inc. (NYSE:BRO) and determine whether hedge funds skillfully traded this stock.

Is Brown & Brown, Inc. (NYSE:BRO) a buy, sell, or hold? The smart money was becoming less confident. The number of bullish hedge fund bets decreased by 2 in recent months. Brown & Brown, Inc. (NYSE:BRO) was in 24 hedge funds’ portfolios at the end of June. The all time high for this statistics is 31. Our calculations also showed that BRO isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 26 hedge funds in our database with BRO positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Sahm Adrangi of Kerrisdale Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 to get excerpts of these letters in your inbox. Now we’re going to take a peek at the recent hedge fund action encompassing Brown & Brown, Inc. (NYSE:BRO).

How are hedge funds trading Brown & Brown, Inc. (NYSE:BRO)?

At Q2’s end, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards BRO over the last 20 quarters. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

The largest stake in Brown & Brown, Inc. (NYSE:BRO) was held by Select Equity Group, which reported holding $514.2 million worth of stock at the end of September. It was followed by Diamond Hill Capital with a $24.7 million position. Other investors bullish on the company included Renaissance Technologies, Prospector Partners, and Kerrisdale Capital. In terms of the portfolio weights assigned to each position Prospector Partners allocated the biggest weight to Brown & Brown, Inc. (NYSE:BRO), around 3.47% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, setting aside 2.95 percent of its 13F equity portfolio to BRO.

Since Brown & Brown, Inc. (NYSE:BRO) has experienced a decline in interest from the smart money, it’s safe to say that there lies a certain “tier” of money managers who sold off their full holdings in the second quarter. At the top of the heap, Ira Unschuld’s Brant Point Investment Management sold off the biggest stake of all the hedgies watched by Insider Monkey, worth about $6 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dumped about $4.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 2 funds in the second quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Brown & Brown, Inc. (NYSE:BRO) but similarly valued. We will take a look at Open Text Corporation (NASDAQ:OTEX), Ceridian HCM Holding Inc. (NYSE:CDAY), Shinhan Financial Group Co., Ltd. (NYSE:SHG), Ulta Beauty, Inc. (NASDAQ:ULTA), Kirkland Lake Gold Ltd. (NYSE:KL), Enel Americas S.A. (NYSE:ENIA), and Apollo Global Management Inc (NYSE:APO). This group of stocks’ market values are similar to BRO’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.7 hedge funds with bullish positions and the average amount invested in these stocks was $837 million. That figure was $634 million in BRO’s case. Ulta Beauty, Inc. (NASDAQ:ULTA) is the most popular stock in this table. On the other hand Shinhan Financial Group Co., Ltd. (NYSE:SHG) is the least popular one with only 2 bullish hedge fund positions. Brown & Brown, Inc. (NYSE:BRO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for BRO is 56.8. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. Hedge funds were also right about betting on BRO, though not to the same extent, as the stock returned 8% since the end of June (through September 25th) and outperformed the market as well.

Disclosure: None. This article was originally published at Insider Monkey.