Hedge Funds Dipping Their Toes Into State Street Corporation (STT)

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 State Street Corporation (NYSE:STT) and determine whether hedge funds skillfully traded this stock.

State Street Corporation (NYSE:STT) shareholders have witnessed an increase in enthusiasm from smart money in recent months. State Street Corporation (NYSE:STT) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 45. There were 34 hedge funds in our database with STT holdings at the end of March. Our calculations also showed that STT 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 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 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 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.

Phillip Gross of Adage Capital

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 precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind we’re going to take a glance at the fresh hedge fund action encompassing State Street Corporation (NYSE:STT).

How have hedgies been trading State Street Corporation (NYSE:STT)?

Heading into the third quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the first quarter of 2020. By comparison, 36 hedge funds held shares or bullish call options in STT a year ago. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

The largest stake in State Street Corporation (NYSE:STT) was held by Yacktman Asset Management, which reported holding $216.3 million worth of stock at the end of September. It was followed by AQR Capital Management with a $196.4 million position. Other investors bullish on the company included GAMCO Investors, Adage Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position Gillson Capital allocated the biggest weight to State Street Corporation (NYSE:STT), around 3.76% of its 13F portfolio. Yacktman Asset Management is also relatively very bullish on the stock, setting aside 3.45 percent of its 13F equity portfolio to STT.

As one would reasonably expect, some big names have been driving this bullishness. Holocene Advisors, managed by Brandon Haley, established the most outsized position in State Street Corporation (NYSE:STT). Holocene Advisors had $24.1 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors also made a $8.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Stuart J. Zimmer’s Zimmer Partners, Michael Gelband’s ExodusPoint Capital, and Parvinder Thiara’s Athanor Capital.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as State Street Corporation (NYSE:STT) but similarly valued. We will take a look at BioMarin Pharmaceutical Inc. (NASDAQ:BMRN), Fortinet Inc (NASDAQ:FTNT), Archer Daniels Midland Company (NYSE:ADM), Palo Alto Networks Inc (NYSE:PANW), Genmab A/S (NASDAQ:GMAB), Dollar Tree, Inc. (NASDAQ:DLTR), and LyondellBasell Industries NV (NYSE:LYB). This group of stocks’ market valuations are similar to STT’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.3 hedge funds with bullish positions and the average amount invested in these stocks was $1577 million. That figure was $668 million in STT’s case. Dollar Tree, Inc. (NASDAQ:DLTR) is the most popular stock in this table. On the other hand Genmab A/S (NASDAQ:GMAB) is the least popular one with only 15 bullish hedge fund positions. State Street Corporation (NYSE:STT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for STT is 54.3. 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 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately STT wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); STT investors were disappointed as the stock returned 7.1% since Q2 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.