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 Toronto-Dominion Bank (NYSE:TD) and determine whether hedge funds had an edge regarding this stock.
Toronto-Dominion Bank (NYSE:TD) was in 19 hedge funds’ portfolios at the end of March. TD shareholders have witnessed an increase in support from the world’s most elite money managers in recent months. There were 17 hedge funds in our database with TD positions at the end of the previous quarter. Our calculations also showed that TD 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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.
Noam Gottesman of GLG Partners
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. 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. 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 key hedge fund action encompassing Toronto-Dominion Bank (NYSE:TD).
What does smart money think about Toronto-Dominion Bank (NYSE:TD)?
Heading into the second quarter of 2020, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the fourth quarter of 2019. On the other hand, there were a total of 18 hedge funds with a bullish position in TD a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
More specifically, Bridgewater Associates was the largest shareholder of Toronto-Dominion Bank (NYSE:TD), with a stake worth $24.9 million reported as of the end of September. Trailing Bridgewater Associates was Marshall Wace LLP, which amassed a stake valued at $23.5 million. Heathbridge Capital Management, D E Shaw, and GLG Partners 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 Heathbridge Capital Management allocated the biggest weight to Toronto-Dominion Bank (NYSE:TD), around 6.19% of its 13F portfolio. McKinley Capital Management is also relatively very bullish on the stock, dishing out 0.79 percent of its 13F equity portfolio to TD.
As aggregate interest increased, specific money managers were breaking ground themselves. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, assembled the most outsized position in Toronto-Dominion Bank (NYSE:TD). Marshall Wace LLP had $23.5 million invested in the company at the end of the quarter. John Overdeck and David Siegel’s Two Sigma Advisors also initiated a $1.8 million position during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Dmitry Balyasny’s Balyasny Asset Management.
Let’s check out hedge fund activity in other stocks similar to Toronto-Dominion Bank (NYSE:TD). We will take a look at BHP Group (NYSE:BBL), Fidelity National Information Services Inc. (NYSE:FIS), Diageo plc (NYSE:DEO), and Sony Corporation (NYSE:SNE). This group of stocks’ market valuations are closest to TD’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BBL | 21 | 802817 | -3 |
| FIS | 105 | 8378290 | 0 |
| DEO | 17 | 621500 | 0 |
| SNE | 28 | 461322 | 2 |
| Average | 42.75 | 2565982 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 42.75 hedge funds with bullish positions and the average amount invested in these stocks was $2566 million. That figure was $154 million in TD’s case. Fidelity National Information Services Inc. (NYSE:FIS) is the most popular stock in this table. On the other hand Diageo plc (NYSE:DEO) is the least popular one with only 17 bullish hedge fund positions. Toronto-Dominion Bank (NYSE:TD) 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately TD wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); TD investors were disappointed as the stock returned 8.8% 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 in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
