Did Hedge Funds Make The Right Call On Lear Corporation (LEA)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Lear Corporation (NYSE:LEA) and determine whether hedge funds had an edge regarding this stock.

Is Lear Corporation (NYSE:LEA) undervalued? Hedge funds were reducing their bets on the stock. The number of bullish hedge fund positions fell by 1 recently. Our calculations also showed that LEA 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). LEA was in 28 hedge funds’ portfolios at the end of the first quarter of 2020. There were 29 hedge funds in our database with LEA positions at the end of the previous quarter.

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

In the financial world there are a multitude of methods investors use to size up their stock investments. Two of the most useful methods are hedge fund and insider trading signals. Our researchers have shown that, historically, those who follow the top picks of the best money managers can outperform the market by a superb amount (see the details here).

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to review the fresh hedge fund action surrounding Lear Corporation (NYSE:LEA).

How are hedge funds trading Lear Corporation (NYSE:LEA)?

Heading into the second quarter of 2020, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. By comparison, 40 hedge funds held shares or bullish call options in LEA a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Pzena Investment Management was the largest shareholder of Lear Corporation (NYSE:LEA), with a stake worth $426.2 million reported as of the end of September. Trailing Pzena Investment Management was Paradice Investment Management, which amassed a stake valued at $46.5 million. AQR Capital Management, Atlantic Investment Management, and Citadel Investment Group 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 Atlantic Investment Management allocated the biggest weight to Lear Corporation (NYSE:LEA), around 11.88% of its 13F portfolio. Paradice Investment Management is also relatively very bullish on the stock, dishing out 5.16 percent of its 13F equity portfolio to LEA.

Seeing as Lear Corporation (NYSE:LEA) has witnessed a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of fund managers that slashed their positions entirely heading into Q4. It’s worth mentioning that Robert Bishop’s Impala Asset Management cut the biggest position of the “upper crust” of funds monitored by Insider Monkey, worth close to $16.8 million in stock. Noam Gottesman’s fund, GLG Partners, also dumped its stock, about $9.6 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 1 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to Lear Corporation (NYSE:LEA). These stocks are Smartsheet Inc. (NYSE:SMAR), Westlake Chemical Corporation (NYSE:WLK), Donaldson Company, Inc. (NYSE:DCI), and Grupo Aval Acciones y Valores S.A. (NYSE:AVAL). This group of stocks’ market caps are similar to LEA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $481 million. That figure was $581 million in LEA’s case. Smartsheet Inc. (NYSE:SMAR) is the most popular stock in this table. On the other hand Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) is the least popular one with only 5 bullish hedge fund positions. Lear Corporation (NYSE:LEA) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on LEA as the stock returned 34.2% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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