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Did Hedge Funds Drop The Ball On Huntington Ingalls Industries Inc (HII) ?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Huntington Ingalls Industries Inc (NYSE:HII).

Huntington Ingalls Industries Inc (NYSE:HII) was in 19 hedge funds’ portfolios at the end of the third quarter of 2019. HII shareholders have witnessed a decrease in activity from the world’s largest hedge funds in recent months. There were 23 hedge funds in our database with HII positions at the end of the previous quarter. Our calculations also showed that HII isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Harding

David Harding of Winton Capital Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a glance at the fresh hedge fund action regarding Huntington Ingalls Industries Inc (NYSE:HII).

How are hedge funds trading Huntington Ingalls Industries Inc (NYSE:HII)?

At the end of the third quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HII over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in Huntington Ingalls Industries Inc (NYSE:HII) was held by AQR Capital Management, which reported holding $369.9 million worth of stock at the end of September. It was followed by Adage Capital Management with a $79.6 million position. Other investors bullish on the company included RR Partners, Winton Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position RR Partners allocated the biggest weight to Huntington Ingalls Industries Inc (NYSE:HII), around 4.55% of its 13F portfolio. Chiron Investment Management is also relatively very bullish on the stock, earmarking 2.17 percent of its 13F equity portfolio to HII.

Since Huntington Ingalls Industries Inc (NYSE:HII) has faced falling interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of hedge funds who were dropping their full holdings heading into Q4. At the top of the heap, Steve Cohen’s Point72 Asset Management sold off the largest stake of the 750 funds followed by Insider Monkey, comprising about $19.6 million in stock. Renaissance Technologies, also sold off its stock, about $13.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 4 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Huntington Ingalls Industries Inc (NYSE:HII) but similarly valued. We will take a look at WEX Inc (NYSE:WEX), Medical Properties Trust, Inc. (NYSE:MPW), Qorvo Inc (NASDAQ:QRVO), and Carlyle Group LP (NASDAQ:CG). This group of stocks’ market valuations are closest to HII’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WEX 25 474044 -6
MPW 12 241800 -1
QRVO 35 1240574 7
CG 7 201850 0
Average 19.75 539567 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $540 million. That figure was $590 million in HII’s case. Qorvo Inc (NASDAQ:QRVO) is the most popular stock in this table. On the other hand Carlyle Group LP (NASDAQ:CG) is the least popular one with only 7 bullish hedge fund positions. Huntington Ingalls Industries Inc (NYSE:HII) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on HII as the stock returned 19.3% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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