The financial services sector is up by nearly 11% year-to-date, according to Morningstar data. The banking industry has contributed somewhere between 3.5% to 4.1% of the gains to the sector’s performance, depending on whether they are operating globally or solely within the U.S. We thought it would be interesting to find out whether the hedge funds that we track have been successful in picking out the best performers in the banking industry. The following list of their top banking industry stock picks has the backing of the rigorous research that these investment firms undertake before investing in any stock and can thus serve as a guideline for everyday investors, who do not necessarily have the resources or the skill-set to pick out the best stocks.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 118% over the last 36 months and outperformed the S&P 500 Index by 60.4 percentage points (see the details here).
5. Bank of New York Mellon Corp (NYSE:BK)
Investors with Long Positions (as of June 30): 62
Aggregate Value of Investors’ Holdings (as of June 30): $6.50 Billion
During the June quarter, Bank of New York Mellon Corp (NYSE:BK)’s popularity increased considerably, as only 51 firms had invested a total of $6.25 billion in the company at the end of March. Although the stock price rose by almost 4% during this period, it is down by about 3.8% year-to-date following the market volatility in the second half of last month. Nelson Peltz‘s Trian Partners is the largest stockholder of Bank of New York Mellon Corp (NYSE:BK) among those that we track, holding more than 30.22 million shares valued at $1.27 billion.
4. Wells Fargo & Co (NYSE:WFC)
Investors with Long Positions (as of June 30): 91
Aggregate Value of Investors’ Holdings (as of June 30): $34.13 Billion
Hedge funds showed a renewed enthusiasm for Wells Fargo & Co (NYSE:WFC), as ownership among funds rose from just 72 firms having invested $32.81 billion in the $261.75 billion financial and bank holding company at the end of the first trimester. Sandler O’Neil recently upgraded Wells Fargo & Co (NYSE:WFC) to ‘Buy’ from ‘Hold’, with a price target of $59 providing an almost 14% upside to the current price. Warren Buffett‘s Berkshire Hathaway is the largest stockholder of Wells Fargo & Co (NYSE:WFC), holding some 470.29 million shares valued at $26.45 billion.
3. Bank of America Corp (NYSE:BAC)
Investors with Long Positions (as of June 30): 95
Aggregate Value of Investors’ Holdings (as of June 30): $7.73 Billion
During the second quarter, Bank of America Corp (NYSE:BAC)’s stock price rose by more than 10%, which was nonetheless greatly eclipsed by the rise in total hedge fund holdings, from $5.62 billion at the end of March. However the total hedge funds piling this capital into the stock fell from 101. So far this year the company’s stock has fallen by more than 11% despite the strong second quarter, which is also one of the reasons why the California Public Employees’ Retirement System and the California State Teachers’ Retirement System are voting against allowing current Bank of America Corp (NYSE:BAC) CEO Brian Moynihan to retain his Chairman post. The pension funds feel that assigning the two roles to one person will cause a conflict of interest and will negatively affect the bank’s performance, especially given the struggle that it had to go through with the Fed stress tests and its sub-par display on the stock market this year. Bruce Berkowitz‘s mutual fund Fairholme is the largest stockholder of Bank of America Corp (NYSE:BAC) within our database, holding more than 75.48 million shares valued at $1.28 billion.
2. JPMorgan Chase & Co. (NYSE:JPM)
Investors with Long Positions (as of June 30): 100
Aggregate Value of Investors’ Holdings (as of June 30): $9.04 Billion
Trading nearly sideways year-to-date, JPMorgan Chase & Co. (NYSE:JPM)’s stock surged by about 12.6% during the June trimester, and the company saw hedge fund interest rise from 95 firms with $7.63 billion worth of shares during that time. Credit Agricole and Keefe Bruyette recently upgraded the stock to ‘Buy’ and ‘Outperform’ respectively, setting price targets that provide an upside of more than 25% to the current trading level. Paul Ruddock and Steven Heinz‘s Lansdowne Partners tops our list of JPMorgan Chase & Co. (NYSE:JPM)’s stockholders as it holds some 21.16 million shares valued at $1.43 billion.
1. Citigroup Inc (NYSE:C)
Investors with Long Positions (as of June 30): 126
Aggregate Value of Investors’ Holdings (as of June 30): $11.8 Billion
Citigroup Inc (NYSE:C)’s popularity remained stable during the second quarter, as the same number of funds had an aggregate investment of $11.63 billion in the company at the end of March. The stock price is down by a little more than 4% on a year-to-date basis. Citigroup Inc (NYSE:C) recently sold off its consumer banking unit in Hungary to Erste Bank Hungary ZRT. The $155.73 billion global financial services company aims to now focus on Hungarian corporations, financial institutions, and public sector clients. Boykin Curry‘s Eagle Capital Managment trimmed its stake in Citigroup Inc (NYSE:C) by 8% during the June quarter to 24.37 million shares.
Disclosure: None
