Invesco Ltd. (IVZ) Fell Out Of Favor With Hedge Funds

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Invesco Ltd. (NYSE:IVZ) and determine whether hedge funds had an edge regarding this stock.

Is Invesco Ltd. (NYSE:IVZ) undervalued? The best stock pickers were in a bearish mood. The number of bullish hedge fund bets shrunk by 4 recently. Invesco Ltd. (NYSE:IVZ) was in 22 hedge funds’ portfolios at the end of June. The all time high for this statistics is 38. Our calculations also showed that IVZ isn’t 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). There were 26 hedge funds in our database with IVZ holdings at the end of March.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 56 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. 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.

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. 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. With all of this in mind let’s take a look at the new hedge fund action encompassing Invesco Ltd. (NYSE:IVZ).

How are hedge funds trading Invesco Ltd. (NYSE:IVZ)?

At Q2’s end, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the first quarter of 2020. By comparison, 20 hedge funds held shares or bullish call options in IVZ a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Invesco Ltd. (NYSE:IVZ) was held by Pzena Investment Management, which reported holding $45 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $38 million position. Other investors bullish on the company included Contrarius Investment Management, Citadel Investment Group, and AQR Capital Management. In terms of the portfolio weights assigned to each position Valueworks LLC allocated the biggest weight to Invesco Ltd. (NYSE:IVZ), around 2.59% of its 13F portfolio. Contrarius Investment Management is also relatively very bullish on the stock, dishing out 1.72 percent of its 13F equity portfolio to IVZ.

Since Invesco Ltd. (NYSE:IVZ) has faced bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of fund managers that slashed their full holdings last quarter. It’s worth mentioning that Paul Tudor Jones’s Tudor Investment Corp cut the biggest position of the “upper crust” of funds followed by Insider Monkey, worth an estimated $2 million in stock. Matthew Hulsizer’s fund, PEAK6 Capital Management, also said goodbye to its stock, about $0.5 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 4 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Invesco Ltd. (NYSE:IVZ). We will take a look at People’s United Financial, Inc. (NASDAQ:PBCT), First Industrial Realty Trust, Inc. (NYSE:FR), Novavax, Inc. (NASDAQ:NVAX), Oshkosh Corporation (NYSE:OSK), Sasol Limited (NYSE:SSL), Grupo Aval Acciones y Valores S.A. (NYSE:AVAL), and The Wendy’s Company (NASDAQ:WEN). All of these stocks’ market caps resemble IVZ’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.4 hedge funds with bullish positions and the average amount invested in these stocks was $363 million. That figure was $161 million in IVZ’s case. The Wendy’s Company (NASDAQ:WEN) is the most popular stock in this table. On the other hand Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) is the least popular one with only 9 bullish hedge fund positions. Invesco Ltd. (NYSE:IVZ) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for IVZ is 46.6. 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately IVZ wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on IVZ were disappointed as the stock returned 7.5% in Q3 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.