How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding American International Group Inc (NYSE:AIG) and determine whether hedge funds had an edge regarding this stock.
Is American International Group Inc (NYSE:AIG) the right pick for your portfolio? Prominent investors were in a pessimistic mood. The number of bullish hedge fund bets shrunk by 3 lately. American International Group Inc (NYSE:AIG) was in 40 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 101. Our calculations also showed that AIG 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Richard S. Pzena of Pzena Investment Management
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 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. Now we’re going to review the new hedge fund action encompassing American International Group Inc (NYSE:AIG).
What does smart money think about American International Group Inc (NYSE:AIG)?
At the end of June, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 41 hedge funds with a bullish position in AIG 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 adding to their holdings substantially (or already accumulated large positions).
Among these funds, Pzena Investment Management held the most valuable stake in American International Group Inc (NYSE:AIG), which was worth $563.9 million at the end of the third quarter. On the second spot was Diamond Hill Capital which amassed $513 million worth of shares. First Pacific Advisors LLC, Arrowstreet Capital, and Levin Easterly Partners 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 Meru Capital allocated the biggest weight to American International Group Inc (NYSE:AIG), around 11.12% of its 13F portfolio. First Pacific Advisors LLC is also relatively very bullish on the stock, setting aside 5.61 percent of its 13F equity portfolio to AIG.
Because American International Group Inc (NYSE:AIG) has experienced bearish sentiment from the smart money, we can see that there was a specific group of hedgies who were dropping their positions entirely heading into Q3. At the top of the heap, Jim Simons (founder)’s Renaissance Technologies cut the biggest investment of the “upper crust” of funds followed by Insider Monkey, valued at close to $18.5 million in stock. Daniel Johnson’s fund, Gillson Capital, also dumped its stock, about $12.3 million worth. These transactions are interesting, as total hedge fund interest fell by 3 funds heading into Q3.
Let’s now review hedge fund activity in other stocks similar to American International Group Inc (NYSE:AIG). These stocks are Cadence Design Systems Inc (NASDAQ:CDNS), The Kroger Co. (NYSE:KR), Microchip Technology Incorporated (NASDAQ:MCHP), Lloyds Banking Group PLC (NYSE:LYG), Franco-Nevada Corporation (NYSE:FNV), Manulife Financial Corporation (NYSE:MFC), and AutoZone, Inc. (NYSE:AZO). This group of stocks’ market caps match AIG’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CDNS | 39 | 1090501 | 8 |
| KR | 41 | 2361525 | -2 |
| MCHP | 33 | 890574 | -5 |
| LYG | 7 | 14116 | -2 |
| FNV | 23 | 1374566 | 2 |
| MFC | 19 | 171076 | -1 |
| AZO | 55 | 2395499 | 10 |
| Average | 31 | 1185408 | 1.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $1185 million. That figure was $2029 million in AIG’s case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 7 bullish hedge fund positions. American International Group Inc (NYSE:AIG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AIG is 48.3. 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 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately AIG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AIG were disappointed as the stock returned -6.5% 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.
Follow American International Group Inc. (NYSE:AIG)
Follow American International Group Inc. (NYSE:AIG)
Disclosure: None. This article was originally published at Insider Monkey.
