Were Hedge Funds Right About Truist Financial Corporation (TFC)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 Truist Financial Corporation (NYSE:TFC).

Truist Financial Corporation (NYSE:TFC) has seen an increase in hedge fund interest of late. Our calculations also showed that TFC isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

John Overdeck of Two Sigma Advisors

Now we’re going to review the recent hedge fund action encompassing Truist Financial Corporation (NYSE:TFC).

Hedge fund activity in Truist Financial Corporation (NYSE:TFC)

At the end of the fourth quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TFC over the last 18 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

The largest stake in Truist Financial Corporation (NYSE:TFC) was held by Citadel Investment Group, which reported holding $327.5 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $93.1 million position. Other investors bullish on the company included Adage Capital Management, Sirios Capital Management, and Gillson Capital. In terms of the portfolio weights assigned to each position Gillson Capital allocated the biggest weight to Truist Financial Corporation (NYSE:TFC), around 4.86% of its 13F portfolio. Sirios Capital Management is also relatively very bullish on the stock, dishing out 4.4 percent of its 13F equity portfolio to TFC.

As industrywide interest jumped, some big names have been driving this bullishness. Citadel Investment Group, managed by Ken Griffin, created the most outsized position in Truist Financial Corporation (NYSE:TFC). Citadel Investment Group had $327.5 million invested in the company at the end of the quarter. John Overdeck and David Siegel’s Two Sigma Advisors also made a $93.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Phill Gross and Robert Atchinson’s Adage Capital Management, John Brennan’s Sirios Capital Management, and Daniel Johnson’s Gillson Capital.

Let’s now take a look at hedge fund activity in other stocks similar to Truist Financial Corporation (NYSE:TFC). We will take a look at Tesla Inc. (NASDAQ:TSLA), CNOOC Limited (NYSE:CEO), The Estee Lauder Companies Inc (NYSE:EL), and Automatic Data Processing (NASDAQ:ADP). This group of stocks’ market caps are similar to TFC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.5 hedge funds with bullish positions and the average amount invested in these stocks was $1949 million. That figure was $876 million in TFC’s case. Tesla Inc. (NASDAQ:TSLA) is the most popular stock in this table. On the other hand CNOOC Limited (NYSE:CEO) is the least popular one with only 14 bullish hedge fund positions. Truist Financial Corporation (NYSE:TFC) is not the least popular stock in this group but hedge fund interest is still below average. 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately TFC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); TFC investors were disappointed as the stock returned -36.5% during the same time period 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.

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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