Were Hedge Funds Right About Aon plc (AON)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Aon plc (NYSE:AON).

Is Aon plc (NYSE:AON) a safe stock to buy now? Investors who are in the know were in a bearish mood. The number of long hedge fund bets were trimmed by 4 in recent months. Aon plc (NYSE:AON) was in 68 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 72. Our calculations also showed that AON isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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. Hedge funds have more than $3.5 trillion in assets under management, so you can’t expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds’ moves today.

Ole Andreas Halvorsen of Viking Global

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium stock. We go through lists like the 10 best EV 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 check out the recent hedge fund action surrounding Aon plc (NYSE:AON).

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

At the end of the second quarter, a total of 68 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the first quarter of 2020. By comparison, 57 hedge funds held shares or bullish call options in AON a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Boykin Curry’s Eagle Capital Management has the largest position in Aon plc (NYSE:AON), worth close to $1.5664 billion, corresponding to 4.5% of its total 13F portfolio. The second largest stake is held by Warren Buffett of Berkshire Hathaway, with a $1.0496 billion position; 0.4% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors with similar optimism include Andreas Halvorsen’s Viking Global, Farallon Capital and Tim Hurd and Ed Magnus’s BlueSpruce Investments. In terms of the portfolio weights assigned to each position Brave Warrior Capital allocated the biggest weight to Aon plc (NYSE:AON), around 10.25% of its 13F portfolio. Ursa Fund Management is also relatively very bullish on the stock, earmarking 9.24 percent of its 13F equity portfolio to AON.

Seeing as Aon plc (NYSE:AON) has faced declining sentiment from the entirety of the hedge funds we track, logic holds that there were a few hedgies who sold off their entire stakes by the end of the second quarter. Intriguingly, Ricky Sandler’s Eminence Capital dropped the largest investment of the “upper crust” of funds tracked by Insider Monkey, worth about $130.7 million in stock. Doug Silverman and Alexander Klabin’s fund, Senator Investment Group, also dropped its stock, about $124 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 4 funds by the end of the second quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Aon plc (NYSE:AON) but similarly valued. We will take a look at IDEXX Laboratories, Inc. (NASDAQ:IDXX), General Dynamics Corporation (NYSE:GD), Takeda Pharmaceutical Company Limited (NYSE:TAK), Enterprise Products Partners L.P. (NYSE:EPD), Spotify Technology S.A. (NYSE:SPOT), Public Storage (NYSE:PSA), and Metlife Inc (NYSE:MET). All of these stocks’ market caps resemble AON’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.1 hedge funds with bullish positions and the average amount invested in these stocks was $2322 million. That figure was $8130 million in AON’s case. Spotify Technology S.A. (NYSE:SPOT) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE:TAK) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Aon plc (NYSE:AON) is more popular among hedge funds. Our overall hedge fund sentiment score for AON is 79.3. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks returned 26.3% in 2021 through October 29th but still managed to beat the market by 2.3 percentage points. Hedge funds were also right about betting on AON as the stock returned 34.5% since the end of June (through 10/29) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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