Was The Smart Money Right About Northrop Grumman (NOC)?

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 in recent 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 certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Northrop Grumman Corporation (NYSE:NOC).

Northrop Grumman Corporation (NYSE:NOC) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. Northrop Grumman Corporation (NYSE:NOC) was in 40 hedge funds’ portfolios at the end of December. The all time high for this statistic is 47. There were 42 hedge funds in our database with NOC positions at the end of the third quarter. Our calculations also showed that NOC isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings).

To most shareholders, hedge funds are assumed to be underperforming, old financial tools of years past. While there are over 8000 funds with their doors open today, We choose to focus on the moguls of this group, about 850 funds. Most estimates calculate that this group of people preside over the majority of the hedge fund industry’s total asset base, and by monitoring their highest performing picks, Insider Monkey has spotted various investment strategies that have historically outpaced the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Also, our monthly newsletter’s portfolio of long stock picks returned 197% since March 2017 (through March 2021) and beat the S&P 500 Index by 124 percentage points. You can download a sample issue of this newsletter on our website .

Sander Gerber of Hudson Bay Capital

At Insider Monkey we leave no stone unturned when looking for 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 hydrogen fuel cell 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. Keeping this in mind we’re going to take a look at the recent hedge fund action surrounding Northrop Grumman Corporation (NYSE:NOC).

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

At the end of December, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. By comparison, 44 hedge funds held shares or bullish call options in NOC a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, D E Shaw was the largest shareholder of Northrop Grumman Corporation (NYSE:NOC), with a stake worth $267.9 million reported as of the end of December. Trailing D E Shaw was Arrowstreet Capital, which amassed a stake valued at $265.7 million. Citadel Investment Group, Renaissance Technologies, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Adam Capital allocated the biggest weight to Northrop Grumman Corporation (NYSE:NOC), around 3.04% of its 13F portfolio. Ariose Capital is also relatively very bullish on the stock, designating 3 percent of its 13F equity portfolio to NOC.

Due to the fact that Northrop Grumman Corporation (NYSE:NOC) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there is a sect of money managers that elected to cut their full holdings last quarter. At the top of the heap, Jinghua Yan’s TwinBeech Capital sold off the biggest investment of the “upper crust” of funds tracked by Insider Monkey, valued at close to $5.2 million in stock, and McKinley Capital Management was right behind this move, as the fund dumped about $4.4 million worth. These transactions are important to note, as total hedge fund interest was cut by 2 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Northrop Grumman Corporation (NYSE:NOC) but similarly valued. These stocks are UBS Group AG (NYSE:UBS), Southern Copper Corporation (NYSE:SCCO), Waste Management, Inc. (NYSE:WM), Koninklijke Philips NV (NYSE:PHG), Bank of Montreal (NYSE:BMO), Monster Beverage Corp (NASDAQ:MNST), and Honda Motor Co Ltd (NYSE:HMC). This group of stocks’ market valuations resemble NOC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.9 hedge funds with bullish positions and the average amount invested in these stocks was $1004 million. That figure was $1508 million in NOC’s case. Monster Beverage Corp (NASDAQ:MNST) is the most popular stock in this table. On the other hand Koninklijke Philips NV (NYSE:PHG) is the least popular one with only 8 bullish hedge fund positions. Northrop Grumman Corporation (NYSE:NOC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NOC is 73. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and still beat the market by 1.6 percentage points. Hedge funds were also right about betting on NOC as the stock returned 16.9% since the end of Q4 (through 4/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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