We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Erie Indemnity Company (NASDAQ:ERIE) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Hedge fund interest in Erie Indemnity Company (NASDAQ:ERIE) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare ERIE to other stocks including Commerce Bancshares, Inc. (NASDAQ:CBSH), Qiagen NV (NASDAQ:QGEN), and Hill-Rom Holdings, Inc. (NYSE:HRC) to get a better sense of its popularity.
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 S&P 500 ETFs by more than 41 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. 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.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to check out the latest hedge fund action encompassing Erie Indemnity Company (NASDAQ:ERIE).
Hedge fund activity in Erie Indemnity Company (NASDAQ:ERIE)
At Q4’s end, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in ERIE a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Erie Indemnity Company (NASDAQ:ERIE), with a stake worth $27.3 million reported as of the end of September. Trailing Royce & Associates was Renaissance Technologies, which amassed a stake valued at $18.5 million. Citadel Investment Group, AQR Capital Management, and Millennium 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 Royce & Associates allocated the biggest weight to Erie Indemnity Company (NASDAQ:ERIE), around 0.24% of its 13F portfolio. Caxton Associates LP is also relatively very bullish on the stock, setting aside 0.05 percent of its 13F equity portfolio to ERIE.
Seeing as Erie Indemnity Company (NASDAQ:ERIE) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there were a few hedge funds that elected to cut their full holdings heading into Q4. At the top of the heap, Ray Dalio’s Bridgewater Associates dumped the largest stake of the 750 funds monitored by Insider Monkey, totaling close to $7.1 million in stock, and David Harding’s Winton Capital Management was right behind this move, as the fund dumped about $1.8 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks similar to Erie Indemnity Company (NASDAQ:ERIE). These stocks are Commerce Bancshares, Inc. (NASDAQ:CBSH), Qiagen NV (NYSE:QGEN), Hill-Rom Holdings, Inc. (NYSE:HRC), and Levi Strauss & Co. (NYSE:LEVI). This group of stocks’ market valuations match ERIE’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CBSH | 10 | 43262 | 1 |
| QGEN | 51 | 585326 | 27 |
| HRC | 27 | 793647 | -2 |
| LEVI | 11 | 34219 | 1 |
| Average | 24.75 | 364114 | 6.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $364 million. That figure was $93 million in ERIE’s case. Qiagen NV (NYSE:QGEN) is the most popular stock in this table. On the other hand Commerce Bancshares, Inc. (NASDAQ:CBSH) is the least popular one with only 10 bullish hedge fund positions. Erie Indemnity Company (NASDAQ:ERIE) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on ERIE as the stock returned -11.5% during the same time period and outperformed the market by an even larger margin.
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.
