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 TransDigm Group Incorporated (NYSE:TDG).
Is TDG a good stock to buy now? TransDigm Group Incorporated (NYSE:TDG) was in 64 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 63. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. TDG investors should pay attention to an increase in support from the world’s most elite money managers lately. There were 62 hedge funds in our database with TDG holdings at the end of June. Our calculations also showed that TDG isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
In the eyes of most shareholders, hedge funds are viewed as unimportant, outdated financial vehicles of the past. While there are more than 8000 funds in operation at present, Our researchers choose to focus on the moguls of this group, approximately 850 funds. These money managers manage bulk of the smart money’s total asset base, and by keeping track of their inimitable stock picks, Insider Monkey has discovered several investment strategies that have historically outpaced the broader indices. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 13% since February 2017 (through November 17th) even though the market was up 65% during the same period. We just shared a list of 6 short targets in our latest quarterly update .
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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 5 best cheap stocks to buy according to Ray Dalio to identify stocks with 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. Now we’re going to take a glance at the key hedge fund action regarding TransDigm Group Incorporated (NYSE:TDG).
How are hedge funds trading TransDigm Group Incorporated (NYSE:TDG)?
At the end of the third quarter, a total of 64 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the second quarter of 2020. By comparison, 60 hedge funds held shares or bullish call options in TDG 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 TransDigm Group Incorporated (NYSE:TDG) was held by Tiger Global Management LLC, which reported holding $834.9 million worth of stock at the end of September. It was followed by Stockbridge Partners with a $738.6 million position. Other investors bullish on the company included AltaRock Partners, Windacre Partnership, and Matrix Capital Management. In terms of the portfolio weights assigned to each position AltaRock Partners allocated the biggest weight to TransDigm Group Incorporated (NYSE:TDG), around 27.45% of its 13F portfolio. Cat Rock Capital is also relatively very bullish on the stock, designating 22.77 percent of its 13F equity portfolio to TDG.
Now, specific money managers have jumped into TransDigm Group Incorporated (NYSE:TDG) headfirst. Third Point, managed by Dan Loeb, established the most outsized position in TransDigm Group Incorporated (NYSE:TDG). Third Point had $206.7 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $38.9 million position during the quarter. The other funds with new positions in the stock are Ross Turner’s Pelham Capital, Dmitry Balyasny’s Balyasny Asset Management, and Louis Bacon’s Moore Global Investments.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as TransDigm Group Incorporated (NYSE:TDG) but similarly valued. These stocks are Fortive Corporation (NYSE:FTV), Rockwell Automation Inc. (NYSE:ROK), Repros Therapeutics Inc (NASDAQ:RPRX), Lennar Corporation (NYSE:LEN), Xilinx, Inc. (NASDAQ:XLNX), Prudential Financial Inc (NYSE:PRU), and Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN). All of these stocks’ market caps match TDG’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FTV | 34 | 1619893 | -1 |
| ROK | 44 | 521128 | -6 |
| RPRX | 20 | 2901046 | -4 |
| LEN | 60 | 1740218 | 5 |
| XLNX | 46 | 1198711 | -1 |
| PRU | 34 | 479419 | 8 |
| ALXN | 58 | 3776330 | 1 |
| Average | 42.3 | 1748106 | 0.3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 42.3 hedge funds with bullish positions and the average amount invested in these stocks was $1748 million. That figure was $6122 million in TDG’s case. Lennar Corporation (NYSE:LEN) is the most popular stock in this table. On the other hand Repros Therapeutics Inc (NASDAQ:RPRX) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks TransDigm Group Incorporated (NYSE:TDG) is more popular among hedge funds. Our overall hedge fund sentiment score for TDG is 87. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 31.6% in 2020 through December 2nd but still managed to beat the market by 16 percentage points. Hedge funds were also right about betting on TDG as the stock returned 25.2% since the end of September (through 12/2) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
