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Why Are Top Investors Disposing of LPL Financial Holdings Inc (LPLA)?

Looking for high-potential stocks? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 5.2% in the 12 months ending October 30, with more than 51% of the stocks in the index failing to beat the benchmark. Therefore, the odds that one will pin down a winner by randomly picking a stock are less than the odds in a fair coin-tossing game. Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of September 2014) generated a return of 9.5% during the same 12-month period, with 63% of these stock picks outperformed the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering a 16-year period indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like LPL Financial Holdings Inc (NASDAQ:LPLA).

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LPL Financial Holdings Inc (NASDAQ:LPLA) was in 18 hedge funds’ portfolios at the end of September. LPL Financial Holdings Inc (NASDAQ:LPLA) shareholders have witnessed a decrease in hedge fund sentiment lately. There were 23 hedge funds in our database with LPL Financial Holdings Inc (NASDAQ:LPLA) positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Nordson Corporation (NASDAQ:NDSN), DST Systems, Inc. (NYSE:DST), and MSC Industrial Direct Co Inc (NYSE:MSM) to gather more data points.

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To the average investor there are a large number of gauges investors can use to grade stocks. A duo of the less utilized gauges are hedge fund and insider trading signals. Hedge fund experts at Insider Monkey have shown that, historically, those who follow the best picks of the best hedge fund managers can outperform the broader indices by a significant margin (see the details here).

Keeping this in mind, let’s review the new action surrounding LPL Financial Holdings Inc (NASDAQ:LPLA).

Hedge fund activity in LPL Financial Holdings Inc (NASDAQ:LPLA)

At the end of Q3, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a decline of 22% from one quarter earlier. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Bob Peck and Andy Raab’s FPR Partners has the most valuable position in LPL Financial Holdings Inc (NASDAQ:LPLA), worth close to $417.3 million, corresponding to 10.4% of its total 13F portfolio. Sitting in the number two spot is SPO Advisory Corp, led by John H. Scully, holding a $346.4 million position; 5.9% of its 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions comprise Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC, Sharlyn C. Heslam’s Stockbridge Partners, and Mick Hellman’s HMI Capital.

Since LPL Financial Holdings Inc (NASDAQ:LPLA) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there was a specific group of hedgies that decided to sell off their positions entirely heading into Q4. At the top of the heap, Gunnar Overstrom’s Three Corner Global Investors sold off the largest stake of all the hedgies monitored by Insider Monkey, comprising close to $11.8 million in stock. David Atterbury’s fund, Whetstone Capital Advisors, also sold off its stock, about $8.8 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by five funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to LPL Financial Holdings Inc (NASDAQ:LPLA). We will take a look at Nordson Corporation (NASDAQ:NDSN), DST Systems, Inc. (NYSE:DST), MSC Industrial Direct Co Inc (NYSE:MSM), and Cinemark Holdings, Inc. (NYSE:CNK). This group of stocks’ market values match LPL Financial Holdings Inc (NASDAQ:LPLA)’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NDSN 17 73450 7
DST 24 278920 -1
MSM 22 606231 7
CNK 19 274328 0

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $308 million. That figure was $1.30 billion in LPL Financial’s case. DST Systems, Inc. (NYSE:DST) is the most popular stock in this table. On the other hand Nordson Corporation (NASDAQ:NDSN) is the least popular one with only 17 bullish hedge fund positions. LPL Financial Holdings Inc (NASDAQ:LPLA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal, but given that the investors who do have positions really like it a lot, and have a lot of money invested in it, this stock may still be worth looking into further, bearing in mind the sliding sentiment of top investors.

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