Were Hedge Funds Right About Shunning British American Tobacco plc (BTI)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of British American Tobacco plc (NYSE:BTI) based on that data and determine whether they were really smart about the stock.

Is British American Tobacco plc (NYSE:BTI) a marvelous stock to buy now? Investors who are in the know were becoming hopeful. The number of long hedge fund bets inched up by 1 in recent months. Our calculations also showed that BTI 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.

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 58 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.

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a glance at the latest hedge fund action encompassing British American Tobacco plc (NYSE:BTI).

How are hedge funds trading British American Tobacco plc (NYSE:BTI)?

At Q1’s end, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards BTI over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Orbis Investment Management was the largest shareholder of British American Tobacco plc (NYSE:BTI), with a stake worth $511.2 million reported as of the end of September. Trailing Orbis Investment Management was Maverick Capital, which amassed a stake valued at $60.8 million. Renaissance Technologies, D E Shaw, and Arrowstreet Capital 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 Orbis Investment Management allocated the biggest weight to British American Tobacco plc (NYSE:BTI), around 4.87% of its 13F portfolio. Maverick Capital is also relatively very bullish on the stock, dishing out 1.28 percent of its 13F equity portfolio to BTI.

As one would reasonably expect, specific money managers were leading the bulls’ herd. D E Shaw, managed by D. E. Shaw, initiated the most outsized position in British American Tobacco plc (NYSE:BTI). D E Shaw had $31.3 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $30.6 million investment in the stock during the quarter. The only other fund with a brand new BTI position is Matthew Hulsizer’s PEAK6 Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to British American Tobacco plc (NYSE:BTI). We will take a look at CVS Health Corporation (NYSE:CVS), QUALCOMM, Incorporated (NASDAQ:QCOM), Starbucks Corporation (NASDAQ:SBUX), and Toronto-Dominion Bank (NYSE:TD). This group of stocks’ market caps are closest to BTI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 54.5 hedge funds with bullish positions and the average amount invested in these stocks was $1569 million. That figure was $681 million in BTI’s case. CVS Health Corporation (NYSE:CVS) is the most popular stock in this table. On the other hand Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks British American Tobacco plc (NYSE:BTI) is even less popular than TD. Hedge funds dodged a bullet by taking a bearish stance towards BTI. 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 BTI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); BTI investors were disappointed as the stock returned 13.5% 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.