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 Brown-Forman Corporation (NYSE:BF) and determine whether hedge funds had an edge regarding this stock.
Hedge fund interest in Brown-Forman Corporation (NYSE:BF) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that BF 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). At the end of this article we will also compare BF to other stocks including Chipotle Mexican Grill, Inc. (NYSE:CMG), The Travelers Companies Inc (NYSE:TRV), and ZTO Express (Cayman) Inc. (NYSE:ZTO) to get a better sense of its popularity.
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 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 58 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap 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 go over the recent hedge fund action encompassing Brown-Forman Corporation (NYSE:BF).
How have hedgies been trading Brown-Forman Corporation (NYSE:BF)?
At Q2’s end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 28 hedge funds with a bullish position in BF a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
The largest stake in Brown-Forman Corporation (NYSE:BF) was held by Gardner Russo & Gardner, which reported holding $198.4 million worth of stock at the end of September. It was followed by Gardner Russo & Gardner with a $91.2 million position. Other investors bullish on the company included Markel Gayner Asset Management, Markel Gayner Asset Management, and GAMCO Investors. In terms of the portfolio weights assigned to each position Gardner Russo & Gardner allocated the biggest weight to Brown-Forman Corporation (NYSE:BF), around 2.02% of its 13F portfolio. Gardner Russo & Gardner is also relatively very bullish on the stock, earmarking 0.93 percent of its 13F equity portfolio to BF.
Due to the fact that Brown-Forman Corporation (NYSE:BF) has witnessed falling interest from the aggregate hedge fund industry, we can see that there exists a select few funds that elected to cut their positions entirely by the end of the second quarter. Intriguingly, Greg Eisner’s Engineers Gate Manager dumped the largest position of the 750 funds tracked by Insider Monkey, comprising about $1.4 million in stock. Ryan Tolkin (CIO)’s fund, Schonfeld Strategic Advisors, also dropped its stock, about $1.3 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Brown-Forman Corporation (NYSE:BF) but similarly valued. We will take a look at Chipotle Mexican Grill, Inc. (NYSE:CMG), The Travelers Companies Inc (NYSE:TRV), ZTO Express (Cayman) Inc. (NYSE:ZTO), Eversource Energy (NYSE:ES), Capital One Financial Corp. (NYSE:COF), Amphenol Corporation (NYSE:APH), and T. Rowe Price Group, Inc. (NASDAQ:TROW). All of these stocks’ market caps are similar to BF’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.1 hedge funds with bullish positions and the average amount invested in these stocks was $1236 million. That figure was $522 million in BF’s case. Capital One Financial Corp. (NYSE:COF) is the most popular stock in this table. On the other hand ZTO Express (Cayman) Inc. (NYSE:ZTO) is the least popular one with only 18 bullish hedge fund positions. Brown-Forman Corporation (NYSE:BF) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for BF is 48.5. 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 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. A small number of hedge funds were also right about betting on BF as the stock returned 17.7% since the end of June (through September 25th) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.