Were Hedge Funds Right About American Financial Group (AFG)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded American Financial Group (NYSE:AFG) and determine whether the smart money was really smart about this stock.

American Financial Group (NYSE:AFG) was in 24 hedge funds’ portfolios at the end of March. AFG shareholders have witnessed a decrease in hedge fund sentiment recently. There were 25 hedge funds in our database with AFG holdings at the end of the previous quarter. Our calculations also showed that AFG 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

If you’d ask most market participants, hedge funds are assumed to be worthless, old investment tools of years past. While there are greater than 8000 funds in operation today, Our researchers look at the moguls of this group, approximately 850 funds. These money managers manage the majority of all hedge funds’ total capital, and by following their unrivaled stock picks, Insider Monkey has deciphered several investment strategies that have historically outpaced Mr. Market. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now let’s analyze the key hedge fund action regarding American Financial Group (NYSE:AFG).

How are hedge funds trading American Financial Group (NYSE:AFG)?

At the end of the first quarter, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AFG over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Lomas Capital Management held the most valuable stake in American Financial Group (NYSE:AFG), which was worth $66.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $62.4 million worth of shares. Renaissance Technologies, Millennium Management, and Two Sigma Advisors 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 Lomas Capital Management allocated the biggest weight to American Financial Group (NYSE:AFG), around 6.6% of its 13F portfolio. Bishop Rock Capital is also relatively very bullish on the stock, setting aside 1.81 percent of its 13F equity portfolio to AFG.

Judging by the fact that American Financial Group (NYSE:AFG) has faced bearish sentiment from hedge fund managers, it’s easy to see that there exists a select few money managers who sold off their entire stakes heading into Q4. It’s worth mentioning that Donald Sussman’s Paloma Partners cut the largest stake of the 750 funds watched by Insider Monkey, totaling close to $1.7 million in stock. Mika Toikka’s fund, AlphaCrest Capital Management, also dropped its stock, about $0.6 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as American Financial Group (NYSE:AFG) but similarly valued. These stocks are Juniper Networks, Inc. (NYSE:JNPR), LKQ Corporation (NASDAQ:LKQ), Formula One Group (NASDAQ:FWONK), and Encompass Health Corporation (NYSE:EHC). This group of stocks’ market caps match AFG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.25 hedge funds with bullish positions and the average amount invested in these stocks was $839 million. That figure was $201 million in AFG’s case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Encompass Health Corporation (NYSE:EHC) is the least popular one with only 33 bullish hedge fund positions. Compared to these stocks American Financial Group (NYSE:AFG) is even less popular than EHC. Hedge funds dodged a bullet by taking a bearish stance towards AFG. 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 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately AFG wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); AFG investors were disappointed as the stock returned -8.9% during the second quarter 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.