Hedge Funds Are Coming Back To Diageo plc (DEO)

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Diageo plc (NYSE:DEO) and determine whether hedge funds skillfully traded this stock.

Is Diageo plc (NYSE:DEO) a buy here? Investors who are in the know were in a bullish mood. The number of bullish hedge fund bets increased by 3 lately. Diageo plc (NYSE:DEO) was in 20 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 25. Our calculations also showed that DEO isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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 34% through August 17th. 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. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s go over the new hedge fund action encompassing Diageo plc (NYSE:DEO).

What does smart money think about Diageo plc (NYSE:DEO)?

Heading into the third quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in DEO over the last 20 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

More specifically, Markel Gayner Asset Management was the largest shareholder of Diageo plc (NYSE:DEO), with a stake worth $181.4 million reported as of the end of September. Trailing Markel Gayner Asset Management was Gardner Russo & Gardner, which amassed a stake valued at $159.5 million. GAMCO Investors, Renaissance Technologies, and Fisher Asset 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 Markel Gayner Asset Management allocated the biggest weight to Diageo plc (NYSE:DEO), around 3.38% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, designating 2.19 percent of its 13F equity portfolio to DEO.

Consequently, key money managers have jumped into Diageo plc (NYSE:DEO) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most outsized position in Diageo plc (NYSE:DEO). Arrowstreet Capital had $18.3 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $12.3 million position during the quarter. The other funds with brand new DEO positions are Lee Ainslie’s Maverick Capital, Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, and Greg Poole’s Echo Street Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to Diageo plc (NYSE:DEO). We will take a look at Intuit Inc. (NASDAQ:INTU), ServiceNow Inc (NYSE:NOW), American Express Company (NYSE:AXP), Morgan Stanley (NYSE:MS), Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF), and Mondelez International Inc (NASDAQ:MDLZ). This group of stocks’ market values match DEO’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 52.4 hedge funds with bullish positions and the average amount invested in these stocks was $5015 million. That figure was $654 million in DEO’s case. ServiceNow Inc (NYSE:NOW) 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 5 bullish hedge fund positions. Diageo plc (NYSE:DEO) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DEO is 32. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately DEO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); DEO investors were disappointed as the stock returned 4.1% in the third 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.