Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like U.S. Bancorp (NYSE:USB).
U.S. Bancorp (NYSE:USB) has experienced an increase in hedge fund sentiment lately. Our calculations also showed that USB isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Warren Buffett of Berkshire Hathaway
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. Keeping this in mind we’re going to view the latest hedge fund action regarding U.S. Bancorp (NYSE:USB).
What does smart money think about U.S. Bancorp (NYSE:USB)?
At Q3’s end, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. By comparison, 39 hedge funds held shares or bullish call options in USB a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
The largest stake in U.S. Bancorp (NYSE:USB) was held by Berkshire Hathaway, which reported holding $7330.3 million worth of stock at the end of September. It was followed by Yacktman Asset Management with a $262.3 million position. Other investors bullish on the company included Arrowstreet Capital, Balyasny Asset Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position Basswood Capital allocated the biggest weight to U.S. Bancorp (NYSE:USB), around 4.66% of its 13F portfolio. Berkshire Hathaway is also relatively very bullish on the stock, setting aside 3.41 percent of its 13F equity portfolio to USB.
As aggregate interest increased, specific money managers were breaking ground themselves. Laurion Capital Management, managed by Benjamin A. Smith, established the most outsized call position in U.S. Bancorp (NYSE:USB). Laurion Capital Management had $14.3 million invested in the company at the end of the quarter. David E. Shaw’s D E Shaw also made a $12.7 million investment in the stock during the quarter. The following funds were also among the new USB investors: Michael Gelband’s ExodusPoint Capital, Gregg Moskowitz’s Interval Partners, and Paul Tudor Jones’s Tudor Investment Corp.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as U.S. Bancorp (NYSE:USB) but similarly valued. These stocks are Lowe’s Companies, Inc. (NYSE:LOW), British American Tobacco plc (NYSE:BTI), Booking Holdings Inc. (NASDAQ:BKNG), and Bristol Myers Squibb Company (NYSE:BMY). All of these stocks’ market caps are closest to USB’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LOW | 69 | 5706061 | 6 |
| BTI | 8 | 374309 | -1 |
| BKNG | 78 | 5427265 | 6 |
| BMY | 56 | 3842079 | -9 |
| Average | 52.75 | 3837429 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 52.75 hedge funds with bullish positions and the average amount invested in these stocks was $3837 million. That figure was $8308 million in USB’s case. Booking Holdings Inc. (NASDAQ:BKNG) is the most popular stock in this table. On the other hand British American Tobacco plc (NYSE:BTI) is the least popular one with only 8 bullish hedge fund positions. U.S. Bancorp (NYSE:USB) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. A small number of hedge funds were also right about betting on USB, though not to the same extent, as the stock returned 33.3% in 2019 (as of 12/23) and outperformed the market.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
