The finance sector has been underperforming the broader market over the last few years. Some parts of this sector have been forced to confront reduced profitability in the wake of the financial crisis, which resulted from fines, increased regulation, and the low interest rate environment. The finance sector has lost 4.7% since the beginning of the year and is still in the red over the last decade. However, the prospect of change in the rate environment might signal a rebound for this industry, and the changes might actually come very soon. In the meantime, hedge funds were pulling their money out of the following finance stocks during the second quarter: Northstar Asset Management Group Inc. (NYSE:NSAM), Ally Financial Inc. (NYSE:ALLY), Citizens Financial Group Inc. (NYSE:CFG), Capital One Financial Corporation (NYSE:COF), and Voya Financial Inc. (NYSE:VOYA). Let’s take a look at each and try to determine why.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 118% over the last 35 months and outperformed the S&P 500 Index by 60 percentage points (see the details here).
Let’s start out by looking into Northstar Asset Management Group Inc. (NYSE:NSAM), a finance stock that was owned by 63 hedge funds at the end of the second quarter, nine funds less than in the prior quarter. The value of the overall investments in the stock decreased as well, falling to $1.61 billion from $2.15 billion. Northstar Asset Management Group, which is a global asset management firm that focuses on managing real estate and other investment platforms, recently appointed David Hamamoto as Executive Chairman, with him also serving as Chairman of NorthStar Realty Finance Corp. (NYSE:NRF). At the same time, Al Tylis has assumed the role of Chief Executive Officer of NSAM and will be serving as a member of both NSAM and NRF’s Board of Directors. It is believed that these moves are part of a strategy that aims to unlock shareholder value at NRF. From the 63 hedge funds that are bullish on Northstar Asset Management Group Inc. (NYSE:NSAM), Robert Pitts’ Steadfast Capital Management represents the largest equity holder of the bunch, with 14.53 million shares.
Moving on to Ally Financial Inc. (NYSE:ALLY), there were 56 hedge funds owning stakes in this company at the end of the second quarter, compared to 67 in the prior quarter. The value of these stakes also decreased to $4.39 billion from $4.98 billion. Just recently, Deutsche Bank, a German global banking and financial services company, raised its price target on Ally to $27 from $24, claiming that the company is an “attractive self-help story that is undervalued”. Moreover, the German firm suggested that all the uncertainty around the loss of the leasing deal with General Motors Company (NYSE:GM) should be vanishing. The shares of Ally Financial have gained slightly over 2% since the beginning of March, but the $27 price target suggests an upside potential of 26% for current and potential investors. In the meantime, Stephen Feinberg’s Cerberus Capital Management is the largest shareholder of Ally Financial Inc. (NYSE:ALLY) within our database, owning a stake of 41.52 million shares.
We’ll now focus our attention on Citizens Financial Group Inc. (NYSE:CFG), whose shares are trading at relatively the same level as they were trading at the beginning of the year. The number of hedge funds and other investors that hold a long position in this stock shrank significantly, to 38 from 76, whereas the value of these positions plummeted to $1.21 billion from $2.33 billion. Citizens Financial Group operates as the bank holding company for Citizens Bank, which is set to return $14 million to individual and business customers in an agreement with federal regulators for failing to credit its customers for all of their deposits. The bank has also been fined $20.5 million by three federal agencies. Some of the largest equity holders in Citizens Financial Group Inc. (NYSE:CFG) within our database include David Einhorn’s Greenlight Capital and Robert Pohly’s Samlyn Capital, owning 12.56 million shares and 5.18 million shares, respectively.
Let’s briefly discuss hedge funds’ sentiment on Capital One Financial Corporation (NYSE:COF), which has seen its stock decline by 8% since the beginning of 2015. Despite the fact that the number of hedge funds with positions in the stock dropped to 41 from 51, the value of the capital invested in the shares of this company was boosted to $1.92 billion from $1.82 billion. Argus, a financial advisory company, recently upgraded its rating on Capital One to “Buy” from “Hold” and established a price target of $92, which yields a potential upside of 20% from the closing price of $76.62 on August 21. The firm suggested that the recent sell-off of the stock triggered by the company’s weak second quarter earnings has created a great buying opportunity. Earlier this month, Capital One announced its plans to acquire an $8.5 billion healthcare loan portfolio from General Electric Company (NYSE:GE), which will reinforce the company’s strategy of expanding into lending operations. Ric Dillon’s Diamond Hill Capital is among the most bullish hedge funds on Capital One Financial Corporation (NYSE:COF) within our database, holding a 3.59 million share-position.
Last of all, Voya Financial Inc. (NYSE:VOYA) is another finance stock that lost interest among hedge funds during the second quarter. The number of hedge funds that held a position in the company decreased to 40 from 55, while the value of these positions shrank to $2.09 billion from $2.77 billion. The shares of Voya have not generated any gains for long-term investors so far this year, as the stock has remained flat year-to-date. In the meantime, the company recently posted its financial results for the second quarter, reporting net income of $285 million, compared to $248 million reported a year ago. At the same time, the company’s ongoing business adjusted operating earnings before income taxes came to $319 million, compared to $346 million reported a year ago. From the pool of 737 actively reporting hedge funds that we track, Ken Griffin’s Citadel Investment Group is listed among the largest shareholders of Voya Financial Inc. (NYSE:VOYA), with a stake of 4.65 million shares.
Disclosure: None
