Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Molson Coors Brewing Company (NYSE:TAP).
Is Molson Coors Brewing Company (NYSE:TAP) the right investment to pursue these days? Hedge funds are reducing their bets on the stock. The number of long hedge fund bets dropped by 2 in recent months. Our calculations also showed that TAP 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
John Rogers of Ariel Investments
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. Let’s take a look at the key hedge fund action regarding Molson Coors Brewing Company (NYSE:TAP).
Hedge fund activity in Molson Coors Brewing Company (NYSE:TAP)
At the end of the third quarter, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the previous quarter. By comparison, 31 hedge funds held shares or bullish call options in TAP a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Molson Coors Brewing Company (NYSE:TAP) was held by AQR Capital Management, which reported holding $104.6 million worth of stock at the end of September. It was followed by Ariel Investments with a $103 million position. Other investors bullish on the company included Diamond Hill Capital, Nitorum Capital, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Nitorum Capital allocated the biggest weight to Molson Coors Brewing Company (NYSE:TAP), around 2.85% of its 13F portfolio. SkyTop Capital Management is also relatively very bullish on the stock, earmarking 1.9 percent of its 13F equity portfolio to TAP.
Judging by the fact that Molson Coors Brewing Company (NYSE:TAP) has witnessed a decline in interest from the aggregate hedge fund industry, it’s safe to say that there were a few funds that slashed their full holdings heading into Q4. Interestingly, Israel Englander’s Millennium Management sold off the biggest stake of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $12.8 million in stock, and Lee Ainslie’s Maverick Capital was right behind this move, as the fund sold off about $5.7 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds heading into Q4.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Molson Coors Brewing Company (NYSE:TAP) but similarly valued. These stocks are IDEX Corporation (NYSE:IEX), Jacobs Engineering Group Inc (NYSE:JEC), MarketAxess Holdings Inc. (NASDAQ:MKTX), and Leidos Holdings Inc (NYSE:LDOS). All of these stocks’ market caps are closest to TAP’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IEX | 19 | 454463 | 4 |
| JEC | 29 | 1023270 | -3 |
| MKTX | 24 | 470073 | 6 |
| LDOS | 24 | 439384 | 1 |
| Average | 24 | 596798 | 2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $597 million. That figure was $447 million in TAP’s case. Jacobs Engineering Group Inc (NYSE:JEC) is the most popular stock in this table. On the other hand IDEX Corporation (NYSE:IEX) is the least popular one with only 19 bullish hedge fund positions. Molson Coors Brewing Company (NYSE:TAP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TAP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TAP investors were disappointed as the stock returned -11.2% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
