Were Hedge Funds Right About Piling Into Verizon Communications Inc. (VZ)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Verizon Communications Inc. (NYSE:VZ).

Verizon Communications Inc. (NYSE:VZ) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 68 hedge funds’ portfolios at the end of June. Our calculations also showed that VZ 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). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as AT&T Inc. (NYSE:T), Adobe Inc. (NASDAQ:ADBE), and Bank of America Corporation (NYSE:BAC) to gather more data points. Our calculations also showed that VZ 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Peter Rathjens of Arrowstreet Capital

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 take a peek at the recent hedge fund action regarding Verizon Communications Inc. (NYSE:VZ).

Hedge fund activity in Verizon Communications Inc. (NYSE:VZ)

At Q2’s end, a total of 68 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in VZ over the last 20 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Verizon Communications Inc. (NYSE:VZ) was held by Skye Global Management, which reported holding $446 million worth of stock at the end of September. It was followed by D E Shaw with a $426 million position. Other investors bullish on the company included Two Sigma Advisors, AQR Capital Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Skye Global Management allocated the biggest weight to Verizon Communications Inc. (NYSE:VZ), around 17.36% of its 13F portfolio. Meru Capital is also relatively very bullish on the stock, earmarking 10.52 percent of its 13F equity portfolio to VZ.

Due to the fact that Verizon Communications Inc. (NYSE:VZ) has witnessed declining sentiment from hedge fund managers, it’s safe to say that there were a few fund managers that elected to cut their positions entirely last quarter. At the top of the heap, Brian Ashford-Russell and Tim Woolley’s Polar Capital dumped the largest investment of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $39.9 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also sold off its stock, about $12.4 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Verizon Communications Inc. (NYSE:VZ) but similarly valued. We will take a look at AT&T Inc. (NYSE:T), Adobe Inc. (NASDAQ:ADBE), Bank of America Corporation (NYSE:BAC), Paypal Holdings Inc (NASDAQ:PYPL), The Walt Disney Company (NYSE:DIS), Tesla Inc. (NASDAQ:TSLA), and Netflix, Inc. (NASDAQ:NFLX). This group of stocks’ market caps resemble VZ’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 96.7 hedge funds with bullish positions and the average amount invested in these stocks was $10421 million. That figure was $2974 million in VZ’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand AT&T Inc. (NYSE:T) is the least popular one with only 57 bullish hedge fund positions. Verizon Communications Inc. (NYSE:VZ) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for VZ is 41.3. 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. This is a slightly negative signal and 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 surpassed the market by 19.7 percentage points. Unfortunately VZ wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); VZ investors were disappointed as the stock returned 7.6% 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 most of these stocks already outperformed the market in 2020.

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