How Did Hedge Funds Fare With Their Citigroup Inc. (C) Bets?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Citigroup Inc. (NYSE:C).

Citigroup Inc. (NYSE:C) was in 96 hedge funds’ portfolios at the end of June. The all time high for this statistics is 121. C investors should be aware of an increase in hedge fund sentiment lately. There were 86 hedge funds in our database with C positions at the end of the first quarter. Our calculations also showed that C currently ranks 23rd among the 30 most popular stocks among hedge funds (click for Q2 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.

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to check out the recent hedge fund action regarding Citigroup Inc. (NYSE:C).

How are hedge funds trading Citigroup Inc. (NYSE:C)?

At second quarter’s end, a total of 96 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from the previous quarter. By comparison, 83 hedge funds held shares or bullish call options in C a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, ValueAct Capital was the largest shareholder of Citigroup Inc. (NYSE:C), with a stake worth $1381 million reported as of the end of September. Trailing ValueAct Capital was Eagle Capital Management, which amassed a stake valued at $1149.3 million. Diamond Hill Capital, Pzena Investment Management, and Lansdowne Partners 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 Tegean Capital Management allocated the biggest weight to Citigroup Inc. (NYSE:C), around 24.96% of its 13F portfolio. ValueAct Capital is also relatively very bullish on the stock, earmarking 15.81 percent of its 13F equity portfolio to C.

Now, key hedge funds were breaking ground themselves. Lansdowne Partners, managed by Suzi Nutton, established the biggest position in Citigroup Inc. (NYSE:C). Lansdowne Partners had $290.7 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also made a $54.8 million investment in the stock during the quarter. The following funds were also among the new C investors: Kahn Brothers, Donald Sussman’s Paloma Partners, and George Soros’s Soros Fund Management.

Let’s check out hedge fund activity in other stocks similar to Citigroup Inc. (NYSE:C). These stocks are Charter Communications, Inc. (NASDAQ:CHTR), Wells Fargo & Company (NYSE:WFC), BHP Group (NYSE:BBL), The Boeing Company (NYSE:BA), PetroChina Company Limited (NYSE:PTR), Pinduoduo Inc. (NASDAQ:PDD), and QUALCOMM, Incorporated (NASDAQ:QCOM). This group of stocks’ market values match C’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.4 hedge funds with bullish positions and the average amount invested in these stocks was $4313 million. That figure was $6229 million in C’s case. Charter Communications, Inc. (NASDAQ:CHTR) is the most popular stock in this table. On the other hand PetroChina Company Limited (NYSE:PTR) is the least popular one with only 6 bullish hedge fund positions. Citigroup Inc. (NYSE:C) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for C is 83.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately C wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on C were disappointed as the stock returned -14.6% since the end of June (through 10/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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