Did Hedge Funds Make The Right Call On HDFC Bank Limited (HDB)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards HDFC Bank Limited (NYSE:HDB) at the end of the first quarter and determine whether the smart money was really smart about this stock.

HDFC Bank Limited (NYSE:HDB) was in 38 hedge funds’ portfolios at the end of March. HDB investors should pay attention to a decrease in hedge fund sentiment in recent months. There were 39 hedge funds in our database with HDB holdings at the end of the previous quarter. Our calculations also showed that HDB isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now we’re going to go over the recent hedge fund action surrounding HDFC Bank Limited (NYSE:HDB).

How are hedge funds trading HDFC Bank Limited (NYSE:HDB)?

At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in HDB over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, GQG Partners held the most valuable stake in HDFC Bank Limited (NYSE:HDB), which was worth $848 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $261 million worth of shares. Two Creeks Capital Management, Steadfast Capital Management, and Route One Investment Company were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Two Creeks Capital Management allocated the biggest weight to HDFC Bank Limited (NYSE:HDB), around 13.55% of its 13F portfolio. Indus Capital is also relatively very bullish on the stock, designating 7.33 percent of its 13F equity portfolio to HDB.

Judging by the fact that HDFC Bank Limited (NYSE:HDB) has experienced falling interest from hedge fund managers, it’s safe to say that there was a specific group of hedgies who sold off their positions entirely heading into Q4. At the top of the heap, John Armitage’s Egerton Capital Limited cut the biggest investment of the “upper crust” of funds watched by Insider Monkey, comprising close to $273.3 million in stock, and Robert Pohly’s Samlyn Capital was right behind this move, as the fund sold off about $164.7 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 1 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as HDFC Bank Limited (NYSE:HDB) but similarly valued. We will take a look at General Electric Company (NYSE:GE), American Express Company (NYSE:AXP), BlackRock, Inc. (NYSE:BLK), and Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF). All of these stocks’ market caps are closest to HDB’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 40 hedge funds with bullish positions and the average amount invested in these stocks was $4987 million. That figure was $1853 million in HDB’s case. General Electric Company (NYSE:GE) is the most popular stock in this table. On the other hand Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) is the least popular one with only 7 bullish hedge fund positions. HDFC Bank Limited (NYSE:HDB) 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. 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately HDB wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HDB investors were disappointed as the stock returned 18.2% during the second quarter 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 in 2020.

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