Were Hedge Funds Wrong About Piling Into LPL Financial Holdings Inc (LPLA)?

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 LPL Financial Holdings Inc (NASDAQ:LPLA).

Is LPL Financial Holdings Inc (NASDAQ:LPLA) a buy, sell, or hold? The best stock pickers were taking an optimistic view. The number of long hedge fund bets went up by 10 recently. LPL Financial Holdings Inc (NASDAQ:LPLA) was in 43 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 41. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that LPLA 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). There were 33 hedge funds in our database with LPLA holdings at the end of March.

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.

Sander Gerber of Hudson Bay 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 best artificial intelligence stocks to pick the best growth 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 analyze the key hedge fund action regarding LPL Financial Holdings Inc (NASDAQ:LPLA).

How have hedgies been trading LPL Financial Holdings Inc (NASDAQ:LPLA)?

At Q2’s end, a total of 43 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 30% from one quarter earlier. On the other hand, there were a total of 31 hedge funds with a bullish position in LPLA a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Samlyn Capital held the most valuable stake in LPL Financial Holdings Inc (NASDAQ:LPLA), which was worth $278.4 million at the end of the third quarter. On the second spot was Southpoint Capital Advisors which amassed $113.7 million worth of shares. First Pacific Advisors LLC, Junto Capital Management, and Engle 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 Engle Capital allocated the biggest weight to LPL Financial Holdings Inc (NASDAQ:LPLA), around 6.32% of its 13F portfolio. Samlyn Capital is also relatively very bullish on the stock, designating 5.15 percent of its 13F equity portfolio to LPLA.

Now, key money managers have been driving this bullishness. Engle Capital, managed by Jeffrey Hoffner, assembled the most outsized position in LPL Financial Holdings Inc (NASDAQ:LPLA). Engle Capital had $39.2 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $38.1 million position during the quarter. The following funds were also among the new LPLA investors: Sander Gerber’s Hudson Bay Capital Management, Principal Global Investors’s Columbus Circle Investors, and Nathaniel August’s Mangrove Partners.

Let’s check out hedge fund activity in other stocks similar to LPL Financial Holdings Inc (NASDAQ:LPLA). We will take a look at BanColombia S.A. (NYSE:CIB), Assurant, Inc. (NYSE:AIZ), Encompass Health Corporation (NYSE:EHC), ADT Inc. (NYSE:ADT), Adaptive Biotechnologies Corporation (NASDAQ:ADPT), Zai Lab Limited (NASDAQ:ZLAB), and Jazz Pharmaceuticals Plc (NASDAQ:JAZZ). This group of stocks’ market values resemble LPLA’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $839 million. That figure was $893 million in LPLA’s case. Jazz Pharmaceuticals Plc (NASDAQ:JAZZ) is the most popular stock in this table. On the other hand BanColombia S.A. (NYSE:CIB) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks LPL Financial Holdings Inc (NASDAQ:LPLA) is more popular among hedge funds. Our overall hedge fund sentiment score for LPLA is 90. 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. 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 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Unfortunately LPLA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LPLA were disappointed as the stock returned 6.4% since the end of the second quarter (through 10/23) 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.