Were These Hedge Funds Wrong About Leidos Holdings Inc (LDOS)?

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 Leidos Holdings Inc (NYSE:LDOS).

Is Leidos Holdings Inc (NYSE:LDOS) a buy, sell, or hold? The best stock pickers were in an optimistic mood. The number of long hedge fund bets inched up by 5 lately. Leidos Holdings Inc (NYSE:LDOS) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that LDOS 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

James Dinan of York Capital 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 telecom 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. Keeping this in mind we’re going to take a glance at the recent hedge fund action surrounding Leidos Holdings Inc (NYSE:LDOS).

How have hedgies been trading Leidos Holdings Inc (NYSE:LDOS)?

At the end of the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the first quarter of 2020. On the other hand, there were a total of 23 hedge funds with a bullish position in LDOS a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Leidos Holdings Inc (NYSE:LDOS) was held by Southpoint Capital Advisors, which reported holding $221 million worth of stock at the end of June. It was followed by Citadel Investment Group with a $137.7 million position. Other investors bullish on the company included Samlyn Capital, AQR Capital Management, and York Capital Management. In terms of the portfolio weights assigned to each position Southpoint Capital Advisors allocated the biggest weight to Leidos Holdings Inc (NYSE:LDOS), around 5.39% of its 13F portfolio. Kerrisdale Capital is also relatively very bullish on the stock, dishing out 1.81 percent of its 13F equity portfolio to LDOS.

As industrywide interest jumped, key money managers were breaking ground themselves. York Capital Management, managed by James Dinan, established the biggest position in Leidos Holdings Inc (NYSE:LDOS). York Capital Management had $24.1 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also made a $23.9 million investment in the stock during the quarter. The following funds were also among the new LDOS investors: Sahm Adrangi’s Kerrisdale Capital, Israel Englander’s Millennium Management, and Benjamin A. Smith’s Laurion Capital Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Leidos Holdings Inc (NYSE:LDOS) but similarly valued. These stocks are Wix.Com Ltd (NASDAQ:WIX), Masco Corporation (NYSE:MAS), The Liberty SiriusXM Group (NASDAQ:LSXMA), Western Digital Corporation (NASDAQ:WDC), MongoDB, Inc. (NASDAQ:MDB), Tradeweb Markets Inc. (NASDAQ:TW), and Mid America Apartment Communities Inc (NYSE:MAA). All of these stocks’ market caps resemble LDOS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.4 hedge funds with bullish positions and the average amount invested in these stocks was $866 million. That figure was $617 million in LDOS’s case. Western Digital Corporation (NASDAQ:WDC) is the most popular stock in this table. On the other hand Wix.Com Ltd (NASDAQ:WIX) is the least popular one with only 27 bullish hedge fund positions. Leidos Holdings Inc (NYSE:LDOS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for LDOS is 58.2. 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 LDOS wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); LDOS investors were disappointed as the stock returned -11% 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.