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Did Hedge Funds Make The Right Call On Brown & Brown, Inc. (BRO) ?

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 & Brown, Inc. (NYSE:BRO) and determine whether hedge funds had an edge regarding this stock.

Is Brown & Brown, Inc. (NYSE:BRO) a bargain? Prominent investors were in an optimistic mood. The number of bullish hedge fund positions inched up by 3 in recent months. Our calculations also showed that BRO 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). BRO was in 26 hedge funds’ portfolios at the end of the first quarter of 2020. There were 23 hedge funds in our database with BRO holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

NAVELLIER & ASSOCIATES

Louis Navellier of Navellier & AssociatesLouis Navellier

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. With all of this in mind let’s take a look at the new hedge fund action regarding Brown & Brown, Inc. (NYSE:BRO).

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

At Q1’s end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in BRO a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Robert Joseph Caruso’s Select Equity Group has the number one position in Brown & Brown, Inc. (NYSE:BRO), worth close to $432.2 million, corresponding to 3% of its total 13F portfolio. The second most bullish fund manager is Renaissance Technologies, holding a $55.7 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining members of the smart money that hold long positions consist of John D. Gillespie’s Prospector Partners, Ric Dillon’s Diamond Hill Capital and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position Prospector Partners allocated the biggest weight to Brown & Brown, Inc. (NYSE:BRO), around 4.65% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, designating 2.98 percent of its 13F equity portfolio to BRO.

As industrywide interest jumped, key hedge funds were breaking ground themselves. Brant Point Investment Management, managed by Ira Unschuld, established the most outsized position in Brown & Brown, Inc. (NYSE:BRO). Brant Point Investment Management had $6 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also made a $4.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Louis Navellier’s Navellier & Associates, Matthew Hulsizer’s PEAK6 Capital Management, and Gregg Moskowitz’s Interval Partners.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Brown & Brown, Inc. (NYSE:BRO) but similarly valued. We will take a look at EPAM Systems Inc (NYSE:EPAM), Hess Corporation (NYSE:HES), Discovery Inc. (NASDAQ:DISCA), and GSX Techedu Inc. (NYSE:GSX). This group of stocks’ market valuations resemble BRO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EPAM 27 338859 -1
HES 28 253381 -6
DISCA 32 233387 -6
GSX 13 204210 3
Average 25 257459 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $257 million. That figure was $586 million in BRO’s case. Discovery Inc. (NASDAQ:DISCA) is the most popular stock in this table. On the other hand GSX Techedu Inc. (NYSE:GSX) is the least popular one with only 13 bullish hedge fund positions. Brown & Brown, Inc. (NYSE:BRO) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 but beat the market by 15.5 percentage points. Unfortunately BRO wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on BRO were disappointed as the stock returned 12.8% during the same time period 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 many of these stocks already outperformed the market so far this year.

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