Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. In this article we are going to take a look at smart money sentiment towards State Street Corporation (NYSE:STT).
State Street Corporation (NYSE:STT) has seen a decrease in hedge fund interest recently. STT was in 33 hedge funds’ portfolios at the end of the third quarter of 2019. There were 36 hedge funds in our database with STT holdings at the end of the previous quarter. Our calculations also showed that STT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Donald Yacktman of Yacktman Asset Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to view the key hedge fund action surrounding State Street Corporation (NYSE:STT).
How are hedge funds trading State Street Corporation (NYSE:STT)?
At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the previous quarter. On the other hand, there were a total of 35 hedge funds with a bullish position in STT a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Among these funds, Yacktman Asset Management held the most valuable stake in State Street Corporation (NYSE:STT), which was worth $254.4 million at the end of the third quarter. On the second spot was D E Shaw which amassed $201.7 million worth of shares. Two Sigma Advisors, Citadel Investment Group, and Arrowstreet Capital 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 Azora Capital allocated the biggest weight to State Street Corporation (NYSE:STT), around 4.07% of its 13F portfolio. Yacktman Asset Management is also relatively very bullish on the stock, designating 3.13 percent of its 13F equity portfolio to STT.
Due to the fact that State Street Corporation (NYSE:STT) has witnessed bearish sentiment from hedge fund managers, it’s easy to see that there exists a select few hedgies who sold off their positions entirely last quarter. Intriguingly, Renaissance Technologies dumped the biggest position of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $24.1 million in stock. Ray Dalio’s fund, Bridgewater Associates, also sold off its stock, about $22.9 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 3 funds last quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as State Street Corporation (NYSE:STT) but similarly valued. These stocks are Cheniere Energy Partners LP (NYSE:CQP), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Kellogg Company (NYSE:K), and Hartford Financial Services Group Inc (NYSE:HIG). This group of stocks’ market valuations are closest to STT’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CQP | 5 | 11230 | -2 |
| ALXN | 46 | 2582286 | 2 |
| K | 27 | 629331 | -1 |
| HIG | 32 | 848897 | 2 |
| Average | 27.5 | 1017936 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $1018 million. That figure was $1207 million in STT’s case. Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is the most popular stock in this table. On the other hand Cheniere Energy Partners LP (NYSE:CQP) is the least popular one with only 5 bullish hedge fund positions. State Street Corporation (NYSE:STT) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately STT wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on STT were disappointed as the stock returned 29.1% in 2019 (through December 23rd) 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 many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
