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.
Is Jefferies Financial Group Inc. (NYSE:JEF) the right investment to pursue these days? Money managers are taking a bearish view. The number of long hedge fund bets fell by 1 lately. Our calculations also showed that JEF isn’t among the 30 most popular stocks among hedge funds (view the video below).
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s review the recent hedge fund action surrounding Jefferies Financial Group Inc. (NYSE:JEF).
Hedge fund activity in Jefferies Financial Group Inc. (NYSE:JEF)
At Q2’s end, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in JEF over the last 16 quarters. With hedgies’ sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Of the funds tracked by Insider Monkey, First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, holds the biggest position in Jefferies Financial Group Inc. (NYSE:JEF). First Pacific Advisors LLC has a $395 million position in the stock, comprising 3.4% of its 13F portfolio. Coming in second is Arlington Value Capital, managed by Allan Mecham and Ben Raybould, which holds a $78.3 million position; 5.3% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors with similar optimism encompass Amit Wadhwaney’s Moerus Capital Management, Gregg J. Powers’s Private Capital Management and Scott Wallace’s Wallace Capital Management.
Due to the fact that Jefferies Financial Group Inc. (NYSE:JEF) has experienced falling interest from hedge fund managers, it’s safe to say that there is a sect of hedge funds that slashed their positions entirely by the end of the second quarter. Intriguingly, Israel Englander’s Millennium Management sold off the biggest stake of the “upper crust” of funds tracked by Insider Monkey, valued at close to $3.8 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund dropped about $1.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds by the end of the second quarter.
Let’s check out hedge fund activity in other stocks similar to Jefferies Financial Group Inc. (NYSE:JEF). These stocks are JetBlue Airways Corporation (NASDAQ:JBLU), National Instruments Corporation (NASDAQ:NATI), The New York Times Company (NYSE:NYT), and Harley-Davidson, Inc. (NYSE:HOG). This group of stocks’ market valuations resemble JEF’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| JBLU | 27 | 637275 | 1 |
| NATI | 22 | 486653 | -6 |
| NYT | 41 | 1278691 | 9 |
| HOG | 14 | 49999 | -2 |
| Average | 26 | 613155 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $613 million. That figure was $678 million in JEF’s case. The New York Times Company (NYSE:NYT) is the most popular stock in this table. On the other hand Harley-Davidson, Inc. (NYSE:HOG) is the least popular one with only 14 bullish hedge fund positions. Jefferies Financial Group Inc. (NYSE:JEF) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on JEF, though not to the same extent, as the stock returned 2.9% during the third quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
