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Did Hedge Funds Drop The Ball On Brown & Brown, Inc. (BRO)?

Billionaire hedge fund managers such as David Abrams, Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the nearly unlimited research abilities of the big players within the hedge fund industry can easily identify the undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks.

Brown & Brown, Inc. (NYSE:BRO) was in 21 hedge funds’ portfolios at the end of the second quarter of 2019. BRO shareholders have witnessed an increase in support from the world’s most elite money managers lately. There were 17 hedge funds in our database with BRO positions at the end of the previous quarter. Our calculations also showed that BRO isn’t among the 30 most popular stocks among hedge funds (view the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

BRO_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a glance at the fresh hedge fund action surrounding Brown & Brown, Inc. (NYSE:BRO).

How have hedgies been trading Brown & Brown, Inc. (NYSE:BRO)?

Heading into the third quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 24% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards BRO over the last 16 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Dmitry Balyasny

Of the funds tracked by Insider Monkey, Robert Joseph Caruso’s Select Equity Group has the largest position in Brown & Brown, Inc. (NYSE:BRO), worth close to $317.1 million, corresponding to 2.2% of its total 13F portfolio. The second largest stake is held by Renaissance Technologies, which holds a $122.3 million position; 0.1% of its 13F portfolio is allocated to the company. Some other professional money managers that hold long positions encompass Ken Griffin’s Citadel Investment Group, Brian Ashford-Russell and Tim Woolley’s Polar Capital and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

As one would reasonably expect, specific money managers have been driving this bullishness. Balyasny Asset Management, managed by Dmitry Balyasny, established the largest position in Brown & Brown, Inc. (NYSE:BRO). Balyasny Asset Management had $3.4 million invested in the company at the end of the quarter. John Overdeck and David Siegel’s Two Sigma Advisors also made a $2.3 million investment in the stock during the quarter. The other funds with brand new BRO positions are Gregg Moskowitz’s Interval Partners, Michael Gelband’s ExodusPoint Capital, and Claes Fornell’s CSat Investment Advisory.

Let’s now review hedge fund activity in other stocks similar to Brown & Brown, Inc. (NYSE:BRO). We will take a look at EPAM Systems Inc (NYSE:EPAM), WestRock Company (NYSE:WRK), 58.com Inc (NYSE:WUBA), and Huntington Ingalls Industries Inc (NYSE:HII). This group of stocks’ market values are similar to BRO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EPAM 23 261441 2
WRK 26 428562 3
WUBA 22 434944 -2
HII 23 668970 -8
Average 23.5 448479 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $448 million. That figure was $760 million in BRO’s case. WestRock Company (NYSE:WRK) is the most popular stock in this table. On the other hand 58.com Inc (NYSE:WUBA) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Brown & Brown, Inc. (NYSE:BRO) is even less popular than WUBA. Hedge funds clearly dropped the ball on BRO as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on BRO as the stock returned 7.9% during the third quarter and outperformed the market by an even larger margin.

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

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