Were These Hedge Funds Right About Dumping Brookfield Asset Management Inc. (BAM)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Brookfield Asset Management Inc. (NYSE:BAM).

Brookfield Asset Management Inc. (NYSE:BAM) has experienced a decrease in hedge fund interest lately. Brookfield Asset Management Inc. (NYSE:BAM) was in 33 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 37. Our calculations also showed that BAM 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.

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 56 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.

Martin Whitman of Third Avenue Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 biggest insurance companies to identify fast growing companies in various industries. 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. Now let’s take a look at the latest hedge fund action encompassing Brookfield Asset Management Inc. (NYSE:BAM).

How are hedge funds trading Brookfield Asset Management Inc. (NYSE:BAM)?

At the end of June, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in BAM over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Akre Capital Management was the largest shareholder of Brookfield Asset Management Inc. (NYSE:BAM), with a stake worth $378.4 million reported as of the end of June. Trailing Akre Capital Management was Markel Gayner Asset Management, which amassed a stake valued at $286.3 million. Citadel Investment Group, Horizon Asset Management, and Third Avenue Management 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 Greenlea Lane Capital allocated the biggest weight to Brookfield Asset Management Inc. (NYSE:BAM), around 12.13% of its 13F portfolio. Third Avenue Management is also relatively very bullish on the stock, earmarking 6.38 percent of its 13F equity portfolio to BAM.

Due to the fact that Brookfield Asset Management Inc. (NYSE:BAM) has experienced falling interest from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of hedgies who were dropping their positions entirely by the end of the second quarter. Interestingly, Robert Joseph Caruso’s Select Equity Group cut the largest position of all the hedgies tracked by Insider Monkey, totaling close to $15.5 million in stock. Brad Dunkley and Blair Levinsky’s fund, Waratah Capital Advisors, also sold off its stock, about $5.6 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 4 funds by the end of the second quarter.

Let’s go over hedge fund activity in other stocks similar to Brookfield Asset Management Inc. (NYSE:BAM). These stocks are Moody’s Corporation (NYSE:MCO), Humana Inc (NYSE:HUM), Northrop Grumman Corporation (NYSE:NOC), Global Payments Inc (NYSE:GPN), Sea Limited (NYSE:SE), Truist Financial Corporation (NYSE:TFC), and CNOOC Limited (NYSE:CEO). This group of stocks’ market valuations match BAM’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 53.6 hedge funds with bullish positions and the average amount invested in these stocks was $3798 million. That figure was $1001 million in BAM’s case. Sea Limited (NYSE:SE) is the most popular stock in this table. On the other hand CNOOC Limited (NYSE:CEO) is the least popular one with only 13 bullish hedge fund positions. Brookfield Asset Management Inc. (NYSE:BAM) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for BAM is 42.2. 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately BAM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); BAM investors were disappointed as the stock returned -9.2% since the end of June (through 10/30) 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.