In this article we will check out the progression of hedge fund sentiment towards TransDigm Group Incorporated (NYSE:TDG) 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.
TransDigm Group Incorporated (NYSE:TDG) has seen a decrease in hedge fund sentiment lately. TDG was in 58 hedge funds’ portfolios at the end of the first quarter of 2020. There were 63 hedge funds in our database with TDG positions at the end of the previous quarter. Our calculations also showed that TDG 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 44 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.
David Abrams of Abrams Capital Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, Europe is set to become the world’s largest cannabis market, so we checked out this European marijuana stock pitch. Also, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this analyst’s “corona catalyst plays“. 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 review the latest hedge fund action encompassing TransDigm Group Incorporated (NYSE:TDG).
How have hedgies been trading TransDigm Group Incorporated (NYSE:TDG)?
At the end of the first quarter, a total of 58 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TDG over the last 18 quarters. 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, Windacre Partnership was the largest shareholder of TransDigm Group Incorporated (NYSE:TDG), with a stake worth $723.9 million reported as of the end of September. Trailing Windacre Partnership was Tiger Global Management LLC, which amassed a stake valued at $562.7 million. Stockbridge Partners, AltaRock Partners, and Matrix 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 Windacre Partnership allocated the biggest weight to TransDigm Group Incorporated (NYSE:TDG), around 32.3% of its 13F portfolio. AltaRock Partners is also relatively very bullish on the stock, setting aside 20.54 percent of its 13F equity portfolio to TDG.
Since TransDigm Group Incorporated (NYSE:TDG) has faced falling interest from hedge fund managers, it’s easy to see that there exists a select few funds that decided to sell off their full holdings last quarter. It’s worth mentioning that John Armitage’s Egerton Capital Limited sold off the largest stake of the 750 funds monitored by Insider Monkey, totaling close to $396.5 million in stock, and James Crichton’s Hitchwood Capital Management was right behind this move, as the fund dropped about $50.4 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 5 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as TransDigm Group Incorporated (NYSE:TDG) but similarly valued. We will take a look at Williams Companies, Inc. (NYSE:WMB), Realty Income Corporation (NYSE:O), New Oriental Education & Technology Group Inc. (NYSE:EDU), and Coca-Cola European Partners plc (NYSE:CCEP). This group of stocks’ market values are closest to TDG’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| WMB | 47 | 552828 | 7 |
| O | 25 | 225190 | -1 |
| EDU | 42 | 1555475 | -8 |
| CCEP | 22 | 185913 | 1 |
| Average | 34 | 629852 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $630 million. That figure was $3801 million in TDG’s case. Williams Companies, Inc. (NYSE:WMB) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks TransDigm Group Incorporated (NYSE:TDG) is more popular among hedge funds. 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 7.9% in 2020 through May 22nd but still managed to beat the market by 15.6 percentage points. Hedge funds were also right about betting on TDG, though not to the same extent, as the stock returned 18.9% in Q2 (through May 22nd) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
