Were Hedge Funds Right About Ditching Bank of America Corporation (BAC)?

In this article we are going to use hedge fund sentiment as a tool and determine whether Bank of America Corporation (NYSE:BAC) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Bank of America Corporation (NYSE:BAC) investors should pay attention to a decrease in hedge fund sentiment recently. Bank of America Corporation (NYSE:BAC) was in 91 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 139. There were 95 hedge funds in our database with BAC holdings at the end of March. We have seen a gradual decline in hedge fund sentiment towards BAC which has been a long time hedge fund favorite. Nevertheless, our calculations also showed that BAC still managed to rank 29th 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.

At the moment there are dozens of methods investors use to assess stocks. A duo of the most under-the-radar methods are hedge fund and insider trading activity. Our experts have shown that, historically, those who follow the best picks of the elite fund managers can trounce the market by a superb margin (see the details here).

Richard S. Pzena of Pzena Investment 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. Now let’s review the latest hedge fund action surrounding Bank of America Corporation (NYSE:BAC).

How have hedgies been trading Bank of America Corporation (NYSE:BAC)?

At Q2’s end, a total of 91 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. By comparison, 94 hedge funds held shares or bullish call options in BAC a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

The largest stake in Bank of America Corporation (NYSE:BAC) was held by Berkshire Hathaway, which reported holding $21969 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $295.8 million position. Other investors bullish on the company included Pzena Investment Management, Adage Capital Management, and Steadfast Capital Management. In terms of the portfolio weights assigned to each position Aquamarine Capital Management allocated the biggest weight to Bank of America Corporation (NYSE:BAC), around 13.28% of its 13F portfolio. Berkshire Hathaway is also relatively very bullish on the stock, designating 10.85 percent of its 13F equity portfolio to BAC.

Judging by the fact that Bank of America Corporation (NYSE:BAC) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of fund managers that decided to sell off their full holdings heading into Q3. It’s worth mentioning that Ricky Sandler’s Eminence Capital sold off the largest investment of the 750 funds monitored by Insider Monkey, worth close to $45.7 million in stock. Daniel Sundheim’s fund, D1 Capital Partners, also dropped its stock, about $43.2 million worth. These transactions are interesting, as total hedge fund interest was cut by 4 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to Bank of America Corporation (NYSE:BAC). These stocks are Paypal Holdings Inc (NASDAQ:PYPL), The Walt Disney Company (NYSE:DIS), Tesla Inc. (NASDAQ:TSLA), Netflix, Inc. (NASDAQ:NFLX), Novartis AG (NYSE:NVS), Cisco Systems, Inc. (NASDAQ:CSCO), and Merck & Co., Inc. (NYSE:MRK). All of these stocks’ market caps resemble BAC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 83 hedge funds with bullish positions and the average amount invested in these stocks was $6711 million. That figure was $24358 million in BAC’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 21 bullish hedge fund positions. Bank of America Corporation (NYSE:BAC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for BAC is 49.1. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 gained 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately BAC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on BAC were disappointed as the stock returned 2.8% since the end of June (through 10/16) 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 many of these stocks already outperformed the market so far this year.

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