Here is What Hedge Funds Really Think About Synchrony Financial (SYF)

Is Synchrony Financial (NYSE:SYF) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Synchrony Financial (NYSE:SYF) the right pick for your portfolio? The smart money is turning less bullish. The number of long hedge fund bets were trimmed by 3 recently. Our calculations also showed that SYF isn’t among the 30 most popular stocks among hedge funds. SYF was in 43 hedge funds’ portfolios at the end of the third quarter of 2019. There were 46 hedge funds in our database with SYF positions at the end of the previous quarter.

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.

Seth Klarman of Baupost Group

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 review the key hedge fund action encompassing Synchrony Financial (NYSE:SYF).

How are hedge funds trading Synchrony Financial (NYSE:SYF)?

Heading into the fourth quarter of 2019, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in SYF over the last 17 quarters. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Warren Buffett’s Berkshire Hathaway has the most valuable position in Synchrony Financial (NYSE:SYF), worth close to $709.2 million, accounting for 0.3% of its total 13F portfolio. The second most bullish fund manager is AQR Capital Management, led by Cliff Asness, holding a $551.5 million position; the fund has 0.6% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Seth Klarman’s Baupost Group and Steve Cohen’s Point72 Asset Management. In terms of the portfolio weights assigned to each position Billings Capital Management allocated the biggest weight to Synchrony Financial (NYSE:SYF), around 17.9% of its portfolio. Southpoint Capital Advisors is also relatively very bullish on the stock, dishing out 2.58 percent of its 13F equity portfolio to SYF.

Because Synchrony Financial (NYSE:SYF) has witnessed declining sentiment from the smart money, we can see that there lies a certain “tier” of funds who were dropping their positions entirely by the end of the third quarter. It’s worth mentioning that David Harding’s Winton Capital Management sold off the biggest stake of all the hedgies followed by Insider Monkey, worth close to $22.9 million in stock, and Ravi Chopra’s Azora Capital was right behind this move, as the fund sold off about $21.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 3 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks similar to Synchrony Financial (NYSE:SYF). We will take a look at Veeva Systems Inc (NYSE:VEEV), American Water Works Company, Inc. (NYSE:AWK), Aptiv PLC (NYSE:APTV), and Verisign, Inc. (NASDAQ:VRSN). This group of stocks’ market values match SYF’s market value.

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As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $2032 million. That figure was $2375 million in SYF’s case. American Water Works Company, Inc. (NYSE:AWK) is the most popular stock in this table. On the other hand Aptiv PLC (NYSE:APTV) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Synchrony Financial (NYSE:SYF) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Hedge funds were also right about betting on SYF as the stock returned 8.9% during Q4 (through 11/22) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

Disclosure: None. This article was originally published at Insider Monkey.