Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The 800+ hedge funds and famous money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the fourth quarter, which unveil their equity positions as of December 31. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund portfolios. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards Diageo plc (NYSE:DEO).
Diageo plc (NYSE:DEO) was in 17 hedge funds’ portfolios at the end of the fourth quarter of 2019. DEO investors should pay attention to a decrease in activity from the world’s largest hedge funds recently. There were 22 hedge funds in our database with DEO positions at the end of the previous quarter. Our calculations also showed that DEO isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
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 S&P 500 ETFs by 41 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.
Tom Gayner of Markel Gayner Asset Management
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 check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind let’s take a peek at the key hedge fund action surrounding Diageo plc (NYSE:DEO).
What have hedge funds been doing with Diageo plc (NYSE:DEO)?
At Q4’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the previous quarter. On the other hand, there were a total of 14 hedge funds with a bullish position in DEO a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Gardner Russo & Gardner, managed by Tom Russo, holds the number one position in Diageo plc (NYSE:DEO). Gardner Russo & Gardner has a $230.1 million position in the stock, comprising 1.8% of its 13F portfolio. On Gardner Russo & Gardner’s heels is Markel Gayner Asset Management, managed by Tom Gayner, which holds a $227.3 million position; the fund has 3.2% of its 13F portfolio invested in the stock. Other professional money managers that are bullish comprise Mario Gabelli’s GAMCO Investors, Anthony Bozza’s Lakewood Capital Management and Ken Fisher’s Fisher Asset Management. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to Diageo plc (NYSE:DEO), around 3.16% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, dishing out 1.98 percent of its 13F equity portfolio to DEO.
Judging by the fact that Diageo plc (NYSE:DEO) has experienced a decline in interest from the smart money, we can see that there exists a select few fund managers who sold off their full holdings in the third quarter. Intriguingly, Israel Englander’s Millennium Management dropped the biggest investment of all the hedgies tracked by Insider Monkey, valued at about $3.7 million in stock. Rajiv Jain’s fund, GQG Partners, also sold off its stock, about $1.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Diageo plc (NYSE:DEO) but similarly valued. These stocks are Toronto-Dominion Bank (NYSE:TD), American Express Company (NYSE:AXP), American Tower Corporation (NYSE:AMT), and 3M Company (NYSE:MMM). This group of stocks’ market caps are closest to DEO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TD | 17 | 312660 | 0 |
| AXP | 58 | 22554070 | 3 |
| AMT | 46 | 3658378 | -6 |
| MMM | 46 | 855763 | -6 |
| Average | 41.75 | 6845218 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 41.75 hedge funds with bullish positions and the average amount invested in these stocks was $6845 million. That figure was $795 million in DEO’s case. American Express Company (NYSE:AXP) is the most popular stock in this table. On the other hand Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Diageo plc (NYSE:DEO) is even less popular than TD. Hedge funds dodged a bullet by taking a bearish stance towards DEO. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but managed to beat the market by 3.1 percentage points. Unfortunately DEO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); DEO investors were disappointed as the stock returned -21.2% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in Q1.
Disclosure: None. This article was originally published at Insider Monkey.
