Should You Avoid TFS Financial Corporation (TFSL)?

In this article we will take a look at whether hedge funds think TFS Financial Corporation (NASDAQ:TFSL) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is TFS Financial Corporation (NASDAQ:TFSL) the right investment to pursue these days? Investors who are in the know are reducing their bets on the stock. The number of bullish hedge fund positions fell by 2 lately. Our calculations also showed that TFSL isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). TFSL was in 9 hedge funds’ portfolios at the end of March. There were 11 hedge funds in our database with TFSL holdings at the end of the previous quarter.

Video: 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Steven Cohen of Point72 Asset Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to check out the latest hedge fund action surrounding TFS Financial Corporation (NASDAQ:TFSL).

How are hedge funds trading TFS Financial Corporation (NASDAQ:TFSL)?

At Q1’s end, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the previous quarter. By comparison, 7 hedge funds held shares or bullish call options in TFSL a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

The largest stake in TFS Financial Corporation (NASDAQ:TFSL) was held by Renaissance Technologies, which reported holding $96.7 million worth of stock at the end of September. It was followed by Empyrean Capital Partners with a $27.3 million position. Other investors bullish on the company included Point72 Asset Management, AQR Capital Management, and Winton Capital Management. In terms of the portfolio weights assigned to each position Empyrean Capital Partners allocated the biggest weight to TFS Financial Corporation (NASDAQ:TFSL), around 1.88% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, setting aside 0.09 percent of its 13F equity portfolio to TFSL.

Judging by the fact that TFS Financial Corporation (NASDAQ:TFSL) has witnessed falling interest from the aggregate hedge fund industry, we can see that there lies a certain “tier” of hedgies that decided to sell off their full holdings heading into Q4. At the top of the heap, Israel Englander’s Millennium Management dropped the biggest position of the “upper crust” of funds watched by Insider Monkey, comprising about $2.9 million in stock, and Ray Dalio’s Bridgewater Associates was right behind this move, as the fund said goodbye to about $1.1 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as TFS Financial Corporation (NASDAQ:TFSL) but similarly valued. These stocks are Globus Medical Inc (NYSE:GMED), Legg Mason, Inc. (NYSE:LM), Flex Ltd. (NASDAQ:FLEX), and First Industrial Realty Trust, Inc. (NYSE:FR). This group of stocks’ market caps resemble TFSL’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $532 million. That figure was $135 million in TFSL’s case. Legg Mason, Inc. (NYSE:LM) is the most popular stock in this table. On the other hand Globus Medical Inc (NYSE:GMED) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks TFS Financial Corporation (NASDAQ:TFSL) is even less popular than GMED. Hedge funds dodged a bullet by taking a bearish stance towards TFSL. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.4% in 2020 through June 22nd but managed to beat the market by 15.9 percentage points. Unfortunately TFSL wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); TFSL investors were disappointed as the stock returned -1.7% during the second quarter (through June 22nd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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