Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Koninklijke Philips NV (NYSE:PHG) was in 7 hedge funds’ portfolios at the end of September. PHG shareholders have witnessed a decrease in hedge fund interest recently. There were 8 hedge funds in our database with PHG holdings at the end of the previous quarter. Our calculations also showed that PHG isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.
John Overdeck of Two Sigma Advisors
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to analyze the new hedge fund action surrounding Koninklijke Philips NV (NYSE:PHG).
Hedge fund activity in Koninklijke Philips NV (NYSE:PHG)
At Q3’s end, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PHG over the last 17 quarters. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
More specifically, Arrowstreet Capital was the largest shareholder of Koninklijke Philips NV (NYSE:PHG), with a stake worth $151.7 million reported as of the end of September. Trailing Arrowstreet Capital was Two Sigma Advisors, which amassed a stake valued at $9.2 million. Millennium Management, Beddow Capital Management, and McKinley Capital Management 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 Beddow Capital Management allocated the biggest weight to Koninklijke Philips NV (NYSE:PHG), around 3.42% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, setting aside 0.35 percent of its 13F equity portfolio to PHG.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Renaissance Technologies. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified PHG as a viable investment and initiated a position in the stock.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Koninklijke Philips NV (NYSE:PHG) but similarly valued. We will take a look at UBS Group AG (NYSE:UBS), Orange S.A. (NYSE:ORAN), Analog Devices, Inc. (NASDAQ:ADI), and JD.Com Inc (NASDAQ:JD). All of these stocks’ market caps are closest to PHG’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| UBS | 16 | 816881 | 2 |
| ORAN | 3 | 2104 | 1 |
| ADI | 43 | 2517774 | -1 |
| JD | 54 | 5279009 | 9 |
| Average | 29 | 2153942 | 2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $2154 million. That figure was $173 million in PHG’s case. JD.Com Inc (NASDAQ:JD) is the most popular stock in this table. On the other hand Orange S.A. (NYSE:ORAN) is the least popular one with only 3 bullish hedge fund positions. Koninklijke Philips NV (NYSE:PHG) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately PHG wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PHG investors were disappointed as the stock returned 0.8% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
