Were Hedge Funds Right Betting On These Finance Stocks in Q4?

Finance represents one of the best-performing sectors over the long-run, even though it is marked by periods of high volatility. Some of the largest companies in the sector are popular among hedge funds and other institutional investors, because of their strong fundamentals and management’s focus on returns to shareholders. With the interest rates having been increased, financial companies are expected to further increase their profits. Moreover, the large amounts of assets and diversification into many businesses allow these companies to carry some intrinsic value that can be unlocked through spin-offs or divestiture. In this article we are going to take a look at the five finance stocks that ranked as the most popular among the funds we track in the last round of 13F filings.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).

#5 Goldman Sachs Group Inc (NYSE:GS)

-Hedge Funds with Long Positions (as of September 30): 63

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $5.57 billion

Let’s start with the investment banking giant Goldman Sachs Group Inc (NYSE:GS), which saw its ownership among funds covered by us declined by four during the third quarter. Though shares of the company managed to rebound during the fourth quarter and gained 4.87%, it wasn’t enough to recoup the 16.5% decline they suffered during the previous quarter. Currently the stock is trading at 8.92 times its forward price to earnings ratio, significantly lower than where most of its investment banking peers are trading.

For the fourth quarter of 2015, Goldman Sachs Group Inc (NYSE:GS) posted a net income of $1.27 per share, significantly below the $4.38 reported a year earlier and lower than the $3.53 per share expected by analysts. However, the revenue of $7.27 billion, even though was down from $7.69 billion posed a year earlier, managed to beat the estimates of $7.07 billion. The drop in profits was mainly due to the $5 billion settlement with the Justice Department and most analysts maintained bullish ratings on the stock, following the report of the results.

#4 Wells Fargo & Co (NYSE:WFC)

-Hedge Funds with Long Positions (as of September 30): 85

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $30.86 billion

Although the number of funds with long positions in Wells Fargo & Co (NYSE:WFC) among funds covered by us declined by six during the third quarter. Moreover, among these investors, 13 funds are managed or founded by billionaires and they hold the largest amount of the aggregate value of holdings. With ownership of over 470 million shares of the company, Warren Buffett‘s Berkshire Hathaway continued to remain the company’s largest shareholder among funds covered by us at the end of September.

The conviction of all these investors on Wells Fargo & Co (NYSE:WFC) paid off rather well during the final quarter of 2015 as the shares of the banking giant appreciated by 6.82% during that period. One can understand why Wells Fargo & Co is such a popular stock among hedge funds by looking at the performance of the company in the last few years. Not only has its stock more than doubled since the start of 2012, but the company also consistently increased its dividends. The $0.38 per share quarterly dividend that Wells Fargo & Co currently pays translates into an attractive annual dividend yield of nearly 3% currently. For the fourth quarter, Wells Fargo delivered mixed results with EPS of $1.03 and revenue of $21.6 billion, compared to estimates of $1.02 and $21.8 billion, respectively.

#3 American International Group Inc (NYSE:AIG)

-Hedge Funds with Long Positions (as of September 30): 94

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $8.42 billion

American International Group Inc (NYSE:AIG) turned out to be one of the best-performing large-cap financial stocks of 2015 in spite of witnessing a decline in popularity among hedge funds during the third quarter. The number of funds bullish on the stock declined by five and the aggregate value of their holdings in the company dropped by almost $3 billion between July and September. Nevertheless, the stock of the company shot through the roof following the release of its third-quarter results, helping it to end the fourth quarter up by almost 10%.

Billionaire investor Carl Icahn disclosing a large stake in the company and going activist on it during the fourth quarter is also one of the reasons why the stock of American International Group exhibited such a decent during that period. After disclosing that he owns 3.42% of the company, which made Icahn Capital the company’s fifth largest shareholder, Mr. Icahn sent a letter to American International Group Inc’s CEO, Peter Hancock, proposing that the company takes measures to improve its return on equity and splits its businesses into three public companies to face less scrutiny from regulators. In November, Mr. Icahn issued a statement on his website highlighting that he will push for measures that will allow shareholders of the company to “express their views directly to the board, which may include a proposal to add a new director who would agree in advance to success Mr. Hancock as CEO if asked by the board to do so”.

Mr. Hancock has started a counter-attack against activist investors like Mr. Icahn. However, several investors and analysts remain skeptical if he would be able to garner much support, especially when many industry experts are still doubtful of  his ability to lead American International Group.

 #2 Bank of America Corp (NYSE:BAC)

-Hedge Funds with Long Positions (as of September 30): 108

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $6.49 billion

Shares of Bank of America Corp (NYSE:BAC) advanced by nearly 10% during the final quarter of 2015. However, that rise was not enough to recoup the losses it suffered earlier in the year as it ended the year down by over 7%. It seems several hedge funds had anticipated that after falling during the third quarter, the stock would rebound  in the fourth quarter and that’s why the number of funds with long positions increased by 13 during the July-September period.

On December 10, the Federal Reserve approved Bank of America Corp (NYSE:BAC)’s resubmitted stress test and allowed it continue paying dividend to investors and buy back shares under its $4 billion repurchase plan. However, the Fed noted that although the bank has made some progress it must “continue to make steady, demonstrable progress” going forward. The Fed also raised concerns about the quality of the bank’s process, including the level of detail it used in its risk models. Bank of America Corp is scheduled to again go through a stress test this summer.

For the last quarter of 2015, Bank of America managed to beat the EPS estimates, reporting $0.28, versus $0.25 expected, while its revenue inched up by 4% on the year to $19.76 and was slightly lower than the $19.82 billion estimated. At the same time, due to lower legal costs, Bank of America posted a total profit of $15.89 billion for the full year, which is the best result reported in nearly a decade.

#1 Citigroup Inc (NYSE:C)

-Hedge Funds with Long Positions (as of September 30): 121

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $10.32 billion

Shares of Citigroup Inc (NYSE:C) had a strong run in the period between February and July last year (up by around 25%), but gave up most of those gains in the highly volatile months of August and October. That decline also ensured that despite rising by 5.61% during the fourth quarter, they ended 2015 down by 5.63%. Although the number of funds covered by us that held shares of the company declined by five during the third quarter, the aggregate value of their holdings in the company declined by 14%. Ken Griffin‘s Citadel Investment Group boosted its stake in the company by 33% to 8.74 million shares during the third quarter.

Citigroup posted better-than-expected results for the fourth quarter of 2015, with EPS of $1.06 topping the estimates of $1.05 and revenue of $18.64 billion, above the $17.87 billion that analysts had expected.

Disclosure: None