Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds’ top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Archer-Daniels-Midland Company (NYSE:ADM) was in 21 hedge funds’ portfolios at the end of September. ADM investors should pay attention to a decrease in activity from the world’s largest hedge funds lately. There were 26 hedge funds in our database with ADM holdings at the end of the previous quarter. Our calculations also showed that ADM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 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.
Tom Gayner of Markel Gayner Asset Management
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. We’re going to view the new hedge fund action regarding Archer-Daniels-Midland Company (NYSE:ADM).
How are hedge funds trading Archer-Daniels-Midland Company (NYSE:ADM)?
Heading into the fourth quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ADM over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Diamond Hill Capital, managed by Ric Dillon, holds the biggest position in Archer-Daniels-Midland Company (NYSE:ADM). Diamond Hill Capital has a $100.4 million position in the stock, comprising 0.5% of its 13F portfolio. Sitting at the No. 2 spot is Levin Easterly Partners, led by John Murphy, holding a $96.4 million position; 2.7% of its 13F portfolio is allocated to the stock. Some other professional money managers that hold long positions encompass Cliff Asness’s AQR Capital Management, Tom Gayner’s Markel Gayner Asset Management and David E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Levin Easterly Partners allocated the biggest weight to Archer-Daniels-Midland Company (NYSE:ADM), around 2.71% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, setting aside 1.38 percent of its 13F equity portfolio to ADM.
Because Archer-Daniels-Midland Company (NYSE:ADM) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of hedgies that elected to cut their positions entirely in the third quarter. Intriguingly, Renaissance Technologies dropped the biggest investment of the “upper crust” of funds followed by Insider Monkey, worth close to $26.2 million in stock, and Lee Ainslie’s Maverick Capital was right behind this move, as the fund dropped about $11.7 million worth. These transactions are interesting, as aggregate hedge fund interest fell 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 Archer-Daniels-Midland Company (NYSE:ADM) but similarly valued. We will take a look at PPL Corporation (NYSE:PPL), United Airlines Holdings, Inc. (NASDAQ:UAL), Royal Caribbean Cruises Ltd. (NYSE:RCL), and KKR & Co Inc. (NYSE:KKR). All of these stocks’ market caps match ADM’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PPL | 24 | 516405 | 4 |
| UAL | 46 | 7090686 | -1 |
| RCL | 45 | 1672773 | -1 |
| KKR | 41 | 3227093 | 5 |
| Average | 39 | 3126739 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $3127 million. That figure was $512 million in ADM’s case. United Airlines Holdings, Inc. (NASDAQ:UAL) is the most popular stock in this table. On the other hand PPL Corporation (NYSE:PPL) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Archer-Daniels-Midland Company (NYSE:ADM) is even less popular than PPL. Hedge funds dodged a bullet by taking a bearish stance towards ADM. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ADM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ADM investors were disappointed as the stock returned 5.4% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
