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2019 Review: Most Favored Hedge Fund Stocks vs. OneMain Holdings Inc (OMF)

It has been a fantastic year for equity investors as Donald Trump pressured Federal Reserve to reduce interest rates and finalized the first leg of a trade deal with China. If you were a passive index fund investor, you had seen gains of 31% in your equity portfolio in 2019. However, if you were an active investor putting your money into hedge funds’ favorite stocks, you had seen gains of more than 41%. In this article we are going to take a look at how hedge funds feel about a stock like OneMain Holdings Inc (NYSE:OMF) and compare its performance against hedge funds’ favorite stocks.

Is OneMain Holdings Inc (NYSE:OMF) a healthy stock for your portfolio? Money managers are getting less optimistic. The number of bullish hedge fund bets decreased by 1 in recent months. Our calculations also showed that OMF isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Bill Miller

Bill Miller of Miller Value Partners

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let’s take a peek at the new hedge fund action regarding OneMain Holdings Inc (NYSE:OMF).

What does smart money think about OneMain Holdings Inc (NYSE:OMF)?

Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards OMF over the last 17 quarters. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Is OMF A Good Stock To Buy?

The largest stake in OneMain Holdings Inc (NYSE:OMF) was held by Miller Value Partners, which reported holding $100.1 million worth of stock at the end of September. It was followed by Basswood Capital with a $68.7 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Adage Capital Management. In terms of the portfolio weights assigned to each position Second Curve Capital allocated the biggest weight to OneMain Holdings Inc (NYSE:OMF), around 5.96% of its 13F portfolio. Basswood Capital is also relatively very bullish on the stock, setting aside 5.02 percent of its 13F equity portfolio to OMF.

Since OneMain Holdings Inc (NYSE:OMF) has experienced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of hedge funds who sold off their full holdings heading into Q4. It’s worth mentioning that Donald Sussman’s Paloma Partners said goodbye to the biggest stake of the 750 funds tracked by Insider Monkey, comprising an estimated $1.4 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund cut about $0.8 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 1 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to OneMain Holdings Inc (NYSE:OMF). These stocks are Wyndham Hotels & Resorts, Inc. (NYSE:WH), Hawaiian Electric Industries, Inc. (NYSE:HE), Nutanix, Inc. (NASDAQ:NTNX), and Companhia Energetica Minas Gerais (NYSE:CIG). This group of stocks’ market values resemble OMF’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WH 36 800953 -4
HE 14 189464 -3
NTNX 24 320502 -1
CIG 8 54517 0
Average 20.5 341359 -2

View table here if you experience formatting issues.

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 $341 million. That figure was $399 million in OMF’s case. Wyndham Hotels & Resorts, Inc. (NYSE:WH) is the most popular stock in this table. On the other hand Companhia Energetica Minas Gerais (NYSE:CIG) is the least popular one with only 8 bullish hedge fund positions. OneMain Holdings Inc (NYSE:OMF) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on OMF as the stock returned 88.4% in 2019 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Disclosure: None. This article was originally published at Insider Monkey.

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