Should I Avoid Honda Motor Co Ltd (HMC)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Honda Motor Co Ltd (NYSE:HMC)? The smart money sentiment can provide an answer to this question.

Honda Motor Co Ltd (NYSE:HMC) was in 10 hedge funds’ portfolios at the end of June. The all time high for this statistic is 13. HMC investors should pay attention to a decrease in hedge fund sentiment recently. There were 12 hedge funds in our database with HMC holdings at the end of March. Our calculations also showed that HMC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 185.4% since March 2017 and outperformed the S&P 500 ETFs by more than 79 percentage points (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Bart Baum of Ionic Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we’re going to take a gander at the recent hedge fund action surrounding Honda Motor Co Ltd (NYSE:HMC).

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

At second quarter’s end, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the first quarter of 2020. By comparison, 10 hedge funds held shares or bullish call options in HMC a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

The largest stake in Honda Motor Co Ltd (NYSE:HMC) was held by Fisher Asset Management, which reported holding $242.9 million worth of stock at the end of June. It was followed by Renaissance Technologies with a $81.2 million position. Other investors bullish on the company included Arrowstreet Capital, Millennium Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Fisher Asset Management allocated the biggest weight to Honda Motor Co Ltd (NYSE:HMC), around 0.15% of its 13F portfolio. Ionic Capital Management is also relatively very bullish on the stock, dishing out 0.1 percent of its 13F equity portfolio to HMC.

Due to the fact that Honda Motor Co Ltd (NYSE:HMC) has faced a decline in interest from hedge fund managers, we can see that there was a specific group of hedge funds who sold off their full holdings in the second quarter. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace LLP sold off the biggest investment of all the hedgies monitored by Insider Monkey, comprising close to $21.4 million in stock. Minhua Zhang’s fund, Weld Capital Management, also said goodbye to its stock, about $0.4 million worth. These transactions are important to note, as total hedge fund interest dropped by 2 funds in the second quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Honda Motor Co Ltd (NYSE:HMC) but similarly valued. We will take a look at Global Payments Inc (NYSE:GPN), Twitter Inc (NYSE:TWTR), Banco Bradesco SA (NYSE:BBD), DocuSign, Inc. (NASDAQ:DOCU), Freeport-McMoRan Inc. (NYSE:FCX), Ambev SA (NYSE:ABEV), and BioNTech SE (NASDAQ:BNTX). This group of stocks’ market values resemble HMC’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 49.3 hedge funds with bullish positions and the average amount invested in these stocks was $2945 million. That figure was $375 million in HMC’s case. Twitter Inc (NYSE:TWTR) is the most popular stock in this table. On the other hand Banco Bradesco SA (NYSE:BBD) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Honda Motor Co Ltd (NYSE:HMC) is even less popular than BBD. Our overall hedge fund sentiment score for HMC is 26.1. 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 dodged a bullet by taking a bearish stance towards HMC. Our calculations showed that the top 5 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 25.7% in 2021 through September 27th but managed to beat the market again by 6.2 percentage points. Unfortunately HMC wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); HMC investors were disappointed as the stock returned -2.2% since the end of the second quarter (through 9/27) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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