Should You Light Up An Investment In Reynolds American, Inc. (RAI)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed over the past few years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that hedge funds do have great stock picking skills, so let’s take a glance at the smart money sentiment towards Reynolds American, Inc. (NYSE:RAI).

Reynolds American, Inc. (NYSE:RAI) was in 39 hedge funds’ portfolios at the end of September. RAI shareholders have witnessed a decrease in support from the world’s most elite money managers recently. There were 40 hedge funds in our database with RAI holdings at the end of the previous 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 Celgene Corporation (NASDAQ:CELG), AstraZeneca plc (ADR) (NYSE:AZN), and Lockheed Martin Corporation (NYSE:LMT) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Now, we’re going to analyze the recent action regarding Reynolds American, Inc. (NYSE:RAI).

Hedge fund activity in Reynolds American, Inc. (NYSE:RAI)

Heading into the fourth quarter of 2016, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a 3% dip from the second quarter of 2016. That marks the second consecutive quarter of largely flat ownership of the stock. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Woodford Investment Management, managed by Neil Woodford, holds the largest position in Reynolds American, Inc. (NYSE:RAI). Woodford Investment Management has a $358.7 million position in the stock, comprising 14.5% of its 13F portfolio. The second most bullish fund manager is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $146.9 million position. Remaining hedge funds and institutional investors with similar optimism comprise Israel Englander’s Millennium Management, David Winters’ Wintergreen Advisers and Phill Gross and Robert Atchinson’s Adage Capital Management.

Judging by the fact that Reynolds American, Inc. (NYSE:RAI) has faced a decline in interest from the smart money, it’s safe to say that there was a specific group of fund managers that decided to sell off their positions entirely in the third quarter. Interestingly, Ken Griffin’s Citadel Investment Group dumped the biggest position of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $10.2 million in stock. David Costen Haley’s fund, HBK Investments, also dumped its stock, about $6.9 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 fund in the third quarter.

Let’s now review hedge fund activity in other stocks similar to Reynolds American, Inc. (NYSE:RAI). We will take a look at Celgene Corporation (NASDAQ:CELG), AstraZeneca plc (ADR) (NYSE:AZN), Lockheed Martin Corporation (NYSE:LMT), and Union Pacific Corporation (NYSE:UNP). This group of stocks’ market caps are similar to RAI’s market cap.

As you can see these stocks had an average of 47.5 hedge funds with bullish positions and the average amount invested in these stocks was $1.62 billion. That figure was $1.07 billion in RAI’s case. Celgene Corporation (NASDAQ:CELG) is the most popular stock in this table. On the other hand AstraZeneca plc (ADR) (NYSE:AZN) is the least popular one with only 27 bullish hedge fund positions. Reynolds American, Inc. (NYSE:RAI) is not the least popular stock in this group but hedge fund interest is still below average and has been flat for 2 quarters. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard CELG or UNP might be better candidates to consider for long positions.

Disclosure: None