Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Hedge fund interest in Martin Marietta Materials, Inc. (NYSE:MLM) 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 MLM to other stocks including Omnicom Group Inc. (NYSE:OMC), Arch Capital Group Ltd. (NASDAQ:ACGL), and Equifax Inc. (NYSE:EFX) to get a better sense of its popularity.
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
John Armitage of Egerton Capital
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the fresh hedge fund action regarding Martin Marietta Materials, Inc. (NYSE:MLM).
Hedge fund activity in Martin Marietta Materials, Inc. (NYSE:MLM)
At Q3’s end, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 33 hedge funds held shares or bullish call options in MLM a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
More specifically, Select Equity Group was the largest shareholder of Martin Marietta Materials, Inc. (NYSE:MLM), with a stake worth $770.5 million reported as of the end of September. Trailing Select Equity Group was Gardner Russo & Gardner, which amassed a stake valued at $476.3 million. Egerton Capital Limited, Alkeon Capital Management, and Iridian Asset 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 RR Partners allocated the biggest weight to Martin Marietta Materials, Inc. (NYSE:MLM), around 9.07% of its portfolio. Red Cedar Management is also relatively very bullish on the stock, setting aside 8.84 percent of its 13F equity portfolio to MLM.
Because Martin Marietta Materials, Inc. (NYSE:MLM) has experienced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of hedgies that elected to cut their entire stakes last quarter. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management cut the largest investment of the “upper crust” of funds watched by Insider Monkey, valued at close to $35.7 million in stock. John Lykouretzos’s fund, Hoplite Capital Management, also dropped its stock, about $19.7 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Martin Marietta Materials, Inc. (NYSE:MLM) but similarly valued. We will take a look at Omnicom Group Inc. (NYSE:OMC), Arch Capital Group Ltd. (NASDAQ:ACGL), Equifax Inc. (NYSE:EFX), and DISH Network Corp. (NASDAQ:DISH). All of these stocks’ market caps resemble MLM’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| OMC | 24 | 478571 | 1 |
| ACGL | 21 | 1306954 | -2 |
| EFX | 26 | 1728610 | -8 |
| DISH | 36 | 1531248 | 4 |
| Average | 26.75 | 1261346 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $1261 million. That figure was $2550 million in MLM’s case. DISH Network Corp. (NASDAQ:DISH) is the most popular stock in this table. On the other hand Arch Capital Group Ltd. (NASDAQ:ACGL) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Martin Marietta Materials, Inc. (NYSE:MLM) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MLM wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MLM were disappointed as the stock returned -1.9% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
