Did Hedge Funds Make The Right Call On Diageo plc (DEO) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtDiageo plc (NYSE:DEO) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Hedge fund interest in Diageo plc (NYSE:DEO) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare DEO to other stocks including Sony Corporation (NYSE:SNE), T-Mobile US, Inc. (NASDAQ:TMUS), and Altria Group Inc (NYSE:MO) to get a better sense of its popularity.

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

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s take a peek at the fresh hedge fund action surrounding Diageo plc (NYSE:DEO).

How are hedge funds trading Diageo plc (NYSE:DEO)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in DEO over the last 18 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Markel Gayner Asset Management, managed by Tom Gayner, holds the biggest position in Diageo plc (NYSE:DEO). Markel Gayner Asset Management has a $171.6 million position in the stock, comprising 3.2% of its 13F portfolio. Coming in second is Tom Russo of Gardner Russo & Gardner, with a $169.8 million position; the fund has 1.7% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions contain Mario Gabelli’s GAMCO Investors, Renaissance Technologies and Ken Fisher’s Fisher Asset Management. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to Diageo plc (NYSE:DEO), around 3.23% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, setting aside 2.63 percent of its 13F equity portfolio to DEO.

Because Diageo plc (NYSE:DEO) has faced a decline in interest from the smart money, it’s easy to see that there is a sect of hedge funds that slashed their entire stakes last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dumped the biggest stake of all the hedgies monitored by Insider Monkey, worth about $34.9 million in stock, and Lee Ainslie’s Maverick Capital was right behind this move, as the fund dumped about $13.8 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to Diageo plc (NYSE:DEO). These stocks are Sony Corporation (NYSE:SNE), T-Mobile US, Inc. (NASDAQ:TMUS), Altria Group Inc (NYSE:MO), and Mondelez International Inc (NASDAQ:MDLZ). This group of stocks’ market valuations match DEO’s market valuation.

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As you can see these stocks had an average of 48.25 hedge funds with bullish positions and the average amount invested in these stocks was $1441 million. That figure was $622 million in DEO’s case. T-Mobile US, Inc. (NASDAQ:TMUS) is the most popular stock in this table. On the other hand Sony Corporation (NYSE:SNE) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Diageo plc (NYSE:DEO) is even less popular than SNE. Hedge funds dodged a bullet by taking a bearish stance towards DEO. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but managed to beat the market by 17.1 percentage points. Unfortunately DEO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); DEO investors were disappointed as the stock returned 14.2% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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