Is DEO Stock A Buy or Sell?

In this article we will take a look at whether hedge funds think Diageo plc (NYSE:DEO) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is DEO stock a buy? Diageo plc (NYSE:DEO) has seen an increase in support from the world’s most elite money managers of late. Diageo plc (NYSE:DEO) was in 23 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 25. Our calculations also showed that DEO isn’t among the 30 most popular stocks among hedge funds (click for Q4 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 S&P 500 ETFs by more than 124 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, auto parts business is a recession resistant business, so we are taking a closer look at this discount auto parts stock that is growing at a 196% annualized rate. We go through lists like the 15 best micro-cap stocks to buy now to identify the next stock with 10x upside potential. 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. With all of this in mind let’s analyze the fresh hedge fund action encompassing Diageo plc (NYSE:DEO).

Do Hedge Funds Think DEO Is A Good Stock To Buy Now?

At the end of December, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from one quarter earlier. By comparison, 17 hedge funds held shares or bullish call options in DEO a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in Diageo plc (NYSE:DEO) was held by Markel Gayner Asset Management, which reported holding $214.4 million worth of stock at the end of December. It was followed by Orbis Investment Management with a $169.5 million position. Other investors bullish on the company included GAMCO Investors, Fisher Asset Management, and 683 Capital Partners. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to Diageo plc (NYSE:DEO), around 3.19% of its 13F portfolio. Fundsmith Long/Short Fund is also relatively very bullish on the stock, setting aside 2.99 percent of its 13F equity portfolio to DEO.

With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, initiated the most outsized position in Diageo plc (NYSE:DEO). Citadel Investment Group had $16.2 million invested in the company at the end of the quarter. Terry Smith’s Fundsmith Long/Short Fund also initiated a $3.7 million position during the quarter. The following funds were also among the new DEO investors: Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, Michael Gelband’s ExodusPoint Capital, and Donald Sussman’s Paloma Partners.

Let’s check out hedge fund activity in other stocks similar to Diageo plc (NYSE:DEO). We will take a look at GlaxoSmithKline plc (NYSE:GSK), Stryker Corporation (NYSE:SYK), Booking Holdings Inc. (NASDAQ:BKNG), Goldman Sachs Group, Inc. (NYSE:GS), Uber Technologies, Inc. (NYSE:UBER), CVS Health Corporation (NYSE:CVS), and Target Corporation (NYSE:TGT). This group of stocks’ market valuations resemble DEO’s market valuation.

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As you can see these stocks had an average of 75.3 hedge funds with bullish positions and the average amount invested in these stocks was $4706 million. That figure was $667 million in DEO’s case. Uber Technologies, Inc. (NYSE:UBER) is the most popular stock in this table. On the other hand GlaxoSmithKline plc (NYSE:GSK) is the least popular one with only 30 bullish hedge fund positions. Compared to these stocks Diageo plc (NYSE:DEO) is even less popular than GSK. Our overall hedge fund sentiment score for DEO is 36.6. 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. Hedge funds clearly dropped the ball on DEO as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 12.3% in 2021 through April 19th and still beat the market by 0.9 percentage points. A small number of hedge funds were also right about betting on DEO as the stock returned 14.9% since Q4 (through April 19th) and outperformed the market by an even larger margin.

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

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