Should You Avoid Arthur J Gallagher & Co (AJG)?

How do you pick the next stock to invest in? One way would be to spend hours 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 Arthur J Gallagher & Co (NYSE:AJG).

Is Arthur J Gallagher & Co (NYSE:AJG) a good stock to buy now? Hedge funds are thoroughly becoming less hopeful. The number of bullish hedge fund investments decreased by 4 lately. There were 12 hedge funds in our database with AJG positions at the end of the 2016 third quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Tractor Supply Company (NASDAQ:TSCO), Nordstrom, Inc. (NYSE:JWN), and Synopsys, Inc. (NASDAQ:SNPS) to gather more data points.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.

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With all of this in mind, let’s go over the new action encompassing Arthur J Gallagher & Co (NYSE:AJG).

What have hedge funds been doing with Arthur J Gallagher & Co (NYSE:AJG)?

Heading into the fourth quarter of 2016, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, down 25% from the second quarter of 2016. Below, you can check out the change in hedge fund sentiment towards AJG over the last 5 quarters. With hedgies’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Citadel Investment Group, led by Ken Griffin, holds the number one position in Arthur J Gallagher & Co (NYSE:AJG). According to its latest 13F filing, the fund has a $15.6 million position in the stock, comprising less than 0.1% of its 13F portfolio. The second largest stake is Millennium Management, one of the 10 largest hedge funds in the world, also with a $15.6 million position; less than 0.1% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism include Chuck Royce’s Royce & Associates, Phill Gross and Robert Atchinson’s Adage Capital Management and Steve Cohen’s Point72 Asset Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Now that we’ve mentioned the most bullish investors, let’s also take a look at some funds that sold off their entire stakes in the stock during the third quarter. Intriguingly, D E Shaw sold off the largest investment of the 700 funds followed by Insider Monkey, totaling an estimated $9.6 million in stock, and Renaissance Technologies was right behind this move, as the fund said goodbye to about $3.1 million worth of Arthur J Gallagher & Co (NYSE:AJG) shares.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Arthur J Gallagher & Co (NYSE:AJG) but similarly valued. We will take a look at Tractor Supply Company (NASDAQ:TSCO), Nordstrom, Inc. (NYSE:JWN), Synopsys, Inc. (NASDAQ:SNPS), and NetSuite Inc (NYSE:N). All of these stocks’ market caps are similar to AJG’s market cap.

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 $413 million. That figure was a meager $87 million in AJG’s case. Nordstrom, Inc. (NYSE:JWN) is the most popular stock in this table. On the other hand Synopsys, Inc. (NASDAQ:SNPS) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Arthur J Gallagher & Co (NYSE:AJG) is even less popular than SNPS. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: none.