In this article we will check out the progression of hedge fund sentiment towards Lear Corporation (NYSE:LEA) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Lear Corporation (NYSE:LEA) was in 28 hedge funds’ portfolios at the end of March. LEA has experienced a decrease in support from the world’s most elite money managers recently. There were 29 hedge funds in our database with LEA holdings at the end of the previous quarter. Our calculations also showed that LEA 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).
Video: 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 S&P 500 ETFs by 58 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.
Alexander Roepers of Atlantic Investment Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one as well as this tiny lithium play. 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. Now let’s view the new hedge fund action regarding Lear Corporation (NYSE:LEA).
Hedge fund activity in Lear Corporation (NYSE:LEA)
At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. On the other hand, there were a total of 40 hedge funds with a bullish position in LEA a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Pzena Investment Management was the largest shareholder of Lear Corporation (NYSE:LEA), with a stake worth $426.2 million reported as of the end of September. Trailing Pzena Investment Management was Paradice Investment Management, which amassed a stake valued at $46.5 million. AQR Capital Management, Atlantic Investment Management, and Citadel Investment Group 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 Atlantic Investment Management allocated the biggest weight to Lear Corporation (NYSE:LEA), around 11.88% of its 13F portfolio. Paradice Investment Management is also relatively very bullish on the stock, earmarking 5.16 percent of its 13F equity portfolio to LEA.
Judging by the fact that Lear Corporation (NYSE:LEA) has experienced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of funds that elected to cut their positions entirely by the end of the first quarter. Intriguingly, Robert Bishop’s Impala Asset Management said goodbye to the biggest investment of the 750 funds watched by Insider Monkey, comprising an estimated $16.8 million in stock. Noam Gottesman’s fund, GLG Partners, also sold off its stock, about $9.6 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds by the end of the first quarter.
Let’s also examine hedge fund activity in other stocks similar to Lear Corporation (NYSE:LEA). We will take a look at Smartsheet Inc. (NYSE:SMAR), Westlake Chemical Corporation (NYSE:WLK), Donaldson Company, Inc. (NYSE:DCI), and Grupo Aval Acciones y Valores S.A. (NYSE:AVAL). All of these stocks’ market caps are similar to LEA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SMAR | 41 | 1678822 | -3 |
| WLK | 20 | 111151 | -2 |
| DCI | 20 | 125557 | -1 |
| AVAL | 5 | 10012 | -2 |
| Average | 21.5 | 481386 | -2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $481 million. That figure was $581 million in LEA’s case. Smartsheet Inc. (NYSE:SMAR) is the most popular stock in this table. On the other hand Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) is the least popular one with only 5 bullish hedge fund positions. Lear Corporation (NYSE:LEA) is not the most popular stock in this group but hedge fund interest is still above average. 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 still beat the market by 13.2 percentage points. Hedge funds were also right about betting on LEA as the stock returned 30.5% in Q2 (through the end of May) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.
