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Did Hedge Funds Make The Right Call On Arthur J. Gallagher & Co. (AJG) ?

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 Arthur J. Gallagher & Co. (NYSE:AJG) and determine whether hedge funds had an edge regarding this stock.

Arthur J. Gallagher & Co. (NYSE:AJG) was in 28 hedge funds’ portfolios at the end of March. AJG has seen a decrease in hedge fund sentiment lately. There were 31 hedge funds in our database with AJG holdings at the end of the previous quarter. Our calculations also showed that AJG isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

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.

Andreas Halvorsen

Andreas Halvorsen of Viking Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to view the new hedge fund action regarding Arthur J. Gallagher & Co. (NYSE:AJG).

Hedge fund activity in Arthur J. Gallagher & Co. (NYSE:AJG)

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in AJG a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Is AJG A Good Stock To Buy?

More specifically, Viking Global was the largest shareholder of Arthur J. Gallagher & Co. (NYSE:AJG), with a stake worth $94.5 million reported as of the end of September. Trailing Viking Global was Adage Capital Management, which amassed a stake valued at $71.8 million. Citadel Investment Group, Millennium Management, and Point72 Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Spindletop Capital allocated the biggest weight to Arthur J. Gallagher & Co. (NYSE:AJG), around 4.74% of its 13F portfolio. Prana Capital Management is also relatively very bullish on the stock, dishing out 3.32 percent of its 13F equity portfolio to AJG.

Seeing as Arthur J. Gallagher & Co. (NYSE:AJG) has faced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of funds who were dropping their full holdings last quarter. It’s worth mentioning that Ron Bobman’s Capital Returns Management dropped the largest stake of the “upper crust” of funds tracked by Insider Monkey, comprising close to $4.5 million in stock, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors was right behind this move, as the fund cut about $4.4 million worth. These moves are important to note, as total hedge fund interest dropped by 3 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Arthur J. Gallagher & Co. (NYSE:AJG). We will take a look at Stanley Black & Decker, Inc. (NYSE:SWK), Marathon Petroleum Corp (NYSE:MPC), Check Point Software Technologies Ltd. (NASDAQ:CHKP), and IAC/InterActiveCorp (NASDAQ:IAC). All of these stocks’ market caps match AJG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SWK 36 907916 -5
MPC 57 996652 -12
CHKP 29 599085 -1
IAC 57 2692755 -14
Average 44.75 1299102 -8

View table here if you experience formatting issues.

As you can see these stocks had an average of 44.75 hedge funds with bullish positions and the average amount invested in these stocks was $1299 million. That figure was $373 million in AJG’s case. Marathon Petroleum Corp (NYSE:MPC) is the most popular stock in this table. On the other hand Check Point Software Technologies Ltd. (NASDAQ:CHKP) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks Arthur J. Gallagher & Co. (NYSE:AJG) is even less popular than CHKP. Hedge funds dodged a bullet by taking a bearish stance towards AJG. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately AJG wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); AJG investors were disappointed as the stock returned 20.2% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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