Were Hedge Funds Right About Crowding Into Capital One Financial Corp. (COF)?

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 Capital One Financial Corp. (NYSE:COF).

Capital One Financial Corp. (NYSE:COF) has experienced an increase in enthusiasm from smart money in recent months. Capital One Financial Corp. (NYSE:COF) was in 55 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 53. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 50 hedge funds in our database with COF holdings at the end of March. Our calculations also showed that COF isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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. 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 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jeffrey Altman of Owl Creek Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind we’re going to go over the latest hedge fund action encompassing Capital One Financial Corp. (NYSE:COF).

How have hedgies been trading Capital One Financial Corp. (NYSE:COF)?

At Q2’s end, a total of 55 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from one quarter earlier. On the other hand, there were a total of 42 hedge funds with a bullish position in COF a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Lone Pine Capital was the largest shareholder of Capital One Financial Corp. (NYSE:COF), with a stake worth $643.3 million reported as of the end of September. Trailing Lone Pine Capital was Pzena Investment Management, which amassed a stake valued at $324.9 million. Citadel Investment Group, Antipodes Partners, and Point72 Asset 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 Tegean Capital Management allocated the biggest weight to Capital One Financial Corp. (NYSE:COF), around 12.59% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, dishing out 5.5 percent of its 13F equity portfolio to COF.

With a general bullishness amongst the heavyweights, some big names have jumped into Capital One Financial Corp. (NYSE:COF) headfirst. Lone Pine Capital, managed by Stephen Mandel (founder), initiated the most outsized position in Capital One Financial Corp. (NYSE:COF). Lone Pine Capital had $643.3 million invested in the company at the end of the quarter. Jeffrey Altman’s Owl Creek Asset Management also initiated a $26.5 million position during the quarter. The following funds were also among the new COF investors: Bill Miller’s Miller Value Partners, Zach Schreiber’s Point State Capital, and Ravi Chopra’s Azora Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Capital One Financial Corp. (NYSE:COF) but similarly valued. These stocks are Amphenol Corporation (NYSE:APH), T. Rowe Price Group, Inc. (NASDAQ:TROW), IDEXX Laboratories, Inc. (NASDAQ:IDXX), Alcon Inc. (NYSE:ALC), CoStar Group Inc (NASDAQ:CSGP), MSCI Inc (NYSE:MSCI), and Marriott International Inc (NASDAQ:MAR). All of these stocks’ market caps are closest to COF’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.9 hedge funds with bullish positions and the average amount invested in these stocks was $1073 million. That figure was $1908 million in COF’s case. CoStar Group Inc (NASDAQ:CSGP) is the most popular stock in this table. On the other hand Alcon Inc. (NYSE:ALC) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Capital One Financial Corp. (NYSE:COF) is more popular among hedge funds. Our overall hedge fund sentiment score for COF is 90. 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 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on COF as the stock returned 26.8% since the end of June (through 10/16) 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.

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