Hedge Funds Have Never Been This Bullish On Legg Mason, Inc. (LM)

In this article we will take a look at whether hedge funds think Legg Mason, Inc. (NYSE:LM) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Legg Mason, Inc. (NYSE:LM) a buy here? Investors who are in the know are in an optimistic mood. The number of bullish hedge fund bets improved by 1 in recent months. Our calculations also showed that LM isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). LM was in 38 hedge funds’ portfolios at the end of the first quarter of 2020. There were 37 hedge funds in our database with LM positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 51 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.

Nelson Peltz of Trian Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the recent hedge fund action surrounding Legg Mason, Inc. (NYSE:LM).

How have hedgies been trading Legg Mason, Inc. (NYSE:LM)?

Heading into the second quarter of 2020, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LM over the last 18 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

The largest stake in Legg Mason, Inc. (NYSE:LM) was held by Trian Partners, which reported holding $189.6 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $120.9 million position. Other investors bullish on the company included Pentwater Capital Management, Carlson Capital, and Water Island Capital. In terms of the portfolio weights assigned to each position White Square Capital allocated the biggest weight to Legg Mason, Inc. (NYSE:LM), around 5.62% of its 13F portfolio. Water Island Capital is also relatively very bullish on the stock, dishing out 5.31 percent of its 13F equity portfolio to LM.

As one would reasonably expect, key hedge funds have jumped into Legg Mason, Inc. (NYSE:LM) headfirst. Pentwater Capital Management, managed by Matthew Halbower, created the most valuable position in Legg Mason, Inc. (NYSE:LM). Pentwater Capital Management had $95.2 million invested in the company at the end of the quarter. Clint Carlson’s Carlson Capital also made a $95.1 million investment in the stock during the quarter. The following funds were also among the new LM investors: John Orrico’s Water Island Capital, Robert Emil Zoellner’s Alpine Associates, and Carl Tiedemann and Michael Tiedemann’s TIG Advisors.

Let’s also examine hedge fund activity in other stocks similar to Legg Mason, Inc. (NYSE:LM). We will take a look at Flex Ltd. (NASDAQ:FLEX), First Industrial Realty Trust, Inc. (NYSE:FR), Planet Fitness Inc (NYSE:PLNT), and Axon Enterprise, Inc. (NASDAQ:AAXN). This group of stocks’ market caps are similar to LM’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $559 million. That figure was $944 million in LM’s case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand Flex Ltd. (NASDAQ:FLEX) is the least popular one with only 24 bullish hedge fund positions. Legg Mason, Inc. (NYSE:LM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 8.3% in 2020 through the end of May but beat the market by 13.2 percentage points. Unfortunately LM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LM were disappointed as the stock returned 2% during the same time period 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 many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.