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 The Unilever Group (NYSE:UN) and compare it to similarly valued companies such as Citigroup Inc. (NYSE:C), HSBC Holdings plc (NYSE:HSBC), Abbott Laboratories (NYSE:ABT), and NIKE, Inc. (NYSE:NKE).
The Unilever Group (NYSE:UN) has seen a decrease in support from the world’s most elite money managers of late. UN was in 15 hedge funds’ portfolios at the end of the third quarter of 2019. There were 16 hedge funds in our database with UN holdings at the end of the previous quarter. Our calculations also showed that UN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 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. 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.
Ken Fisher of Fisher Asset Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to check out the new hedge fund action encompassing The Unilever Group (NYSE:UN).
How have hedgies been trading The Unilever Group (NYSE:UN)?
Heading into the fourth quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the second quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in UN a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
More specifically, Gardner Russo & Gardner was the largest shareholder of The Unilever Group (NYSE:UN), with a stake worth $758.8 million reported as of the end of September. Trailing Gardner Russo & Gardner was Arrowstreet Capital, which amassed a stake valued at $272.8 million. Fisher Asset Management, Osterweis Capital Management, and Wallace Capital 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 Gardner Russo & Gardner allocated the biggest weight to The Unilever Group (NYSE:UN), around 5.91% of its 13F portfolio. Wallace Capital Management is also relatively very bullish on the stock, designating 2.33 percent of its 13F equity portfolio to UN.
Due to the fact that The Unilever Group (NYSE:UN) has experienced falling interest from the smart money, it’s easy to see that there exists a select few fund managers who sold off their entire stakes by the end of the third quarter. Intriguingly, Matthew Hulsizer’s PEAK6 Capital Management sold off the largest investment of all the hedgies monitored by Insider Monkey, worth an estimated $7.3 million in stock. Lee Ainslie’s fund, Maverick Capital, also said goodbye to its stock, about $6 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as The Unilever Group (NYSE:UN) but similarly valued. We will take a look at Citigroup Inc. (NYSE:C), HSBC Holdings plc (NYSE:HSBC), Abbott Laboratories (NYSE:ABT), and NIKE, Inc. (NYSE:NKE). All of these stocks’ market caps resemble UN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| C | 94 | 10270591 | 11 |
| HSBC | 14 | 1124229 | -2 |
| ABT | 58 | 2062528 | 11 |
| NKE | 63 | 2304473 | 12 |
| Average | 57.25 | 3940455 | 8 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 57.25 hedge funds with bullish positions and the average amount invested in these stocks was $3940 million. That figure was $1158 million in UN’s case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand HSBC Holdings plc (NYSE:HSBC) is the least popular one with only 14 bullish hedge fund positions. The Unilever Group (NYSE:UN) is not the least popular stock in this group but hedge fund interest is still below average. 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 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 UN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); UN investors were disappointed as the stock returned 0% 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.
