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Did Hedge Funds Make The Right Call On Assured Guaranty Ltd. (AGO) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Assured Guaranty Ltd. (NYSE:AGO) and determine whether the smart money was really smart about this stock.

Assured Guaranty Ltd. (NYSE:AGO) investors should be aware of a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that AGO 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.

Irving Kahn

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. Keeping this in mind we’re going to review the fresh hedge fund action surrounding Assured Guaranty Ltd. (NYSE:AGO).

Hedge fund activity in Assured Guaranty Ltd. (NYSE:AGO)

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the fourth quarter of 2019. On the other hand, there were a total of 34 hedge funds with a bullish position in AGO a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AGO A Good Stock To Buy?

Among these funds, AQR Capital Management held the most valuable stake in Assured Guaranty Ltd. (NYSE:AGO), which was worth $92.1 million at the end of the third quarter. On the second spot was Kahn Brothers which amassed $37.8 million worth of shares. Arrowstreet Capital, GLG Partners, and Samlyn Capital 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 Sonic Capital allocated the biggest weight to Assured Guaranty Ltd. (NYSE:AGO), around 11.17% of its 13F portfolio. Tegean Capital Management is also relatively very bullish on the stock, designating 11.11 percent of its 13F equity portfolio to AGO.

Since Assured Guaranty Ltd. (NYSE:AGO) has faced falling interest from the entirety of the hedge funds we track, we can see that there is a sect of hedge funds that elected to cut their entire stakes in the first quarter. Intriguingly, Frank Brosens’s Taconic Capital dumped the largest investment of the 750 funds tracked by Insider Monkey, worth close to $44.1 million in stock. William C. Martin’s fund, Raging Capital Management, also dumped its stock, about $18.6 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 5 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Assured Guaranty Ltd. (NYSE:AGO) but similarly valued. We will take a look at W.R. Grace & Co. (NYSE:GRA), Amicus Therapeutics, Inc. (NASDAQ:FOLD), Envista Holdings Corporation (NYSE:NVST), and Tripadvisor Inc (NASDAQ:TRIP). This group of stocks’ market caps resemble AGO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GRA 35 866211 -11
FOLD 28 842269 -7
NVST 22 273772 -20
TRIP 30 492031 -9
Average 28.75 618571 -11.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $619 million. That figure was $300 million in AGO’s case. W.R. Grace & Co. (NYSE:GRA) is the most popular stock in this table. On the other hand Envista Holdings Corporation (NYSE:NVST) is the least popular one with only 22 bullish hedge fund positions. Assured Guaranty Ltd. (NYSE:AGO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately AGO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); AGO investors were disappointed as the stock returned -4.6% 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 in 2020.

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