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Did Hedge Funds Make The Right Call On Fifth Third Bancorp (FITB) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Fifth Third Bancorp (NASDAQ:FITB) and determine whether hedge funds skillfully traded this stock.

Fifth Third Bancorp (NASDAQ:FITB) investors should be aware of a decrease in support from the world’s most elite money managers recently. FITB was in 30 hedge funds’ portfolios at the end of the first quarter of 2020. There were 41 hedge funds in our database with FITB positions at the end of the previous quarter. Our calculations also showed that FITB 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Phill Gross of Adage Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now we’re going to take a look at the new hedge fund action encompassing Fifth Third Bancorp (NASDAQ:FITB).

How are hedge funds trading Fifth Third Bancorp (NASDAQ:FITB)?

At Q1’s end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -27% from the fourth quarter of 2019. On the other hand, there were a total of 38 hedge funds with a bullish position in FITB a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the biggest position in Fifth Third Bancorp (NASDAQ:FITB). AQR Capital Management has a $106.1 million position in the stock, comprising 0.2% of its 13F portfolio. Coming in second is Pzena Investment Management, led by Richard S. Pzena, holding a $78.2 million position; 0.6% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that are bullish include Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Renaissance Technologies and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Hourglass Capital allocated the biggest weight to Fifth Third Bancorp (NASDAQ:FITB), around 2.48% of its 13F portfolio. Fourthstone LLC is also relatively very bullish on the stock, earmarking 1.29 percent of its 13F equity portfolio to FITB.

Since Fifth Third Bancorp (NASDAQ:FITB) has witnessed a decline in interest from the smart money, we can see that there is a sect of funds who sold off their positions entirely heading into Q4. Intriguingly, Clint Carlson’s Carlson Capital dumped the biggest position of the 750 funds followed by Insider Monkey, totaling close to $38.9 million in stock. Ravi Chopra’s fund, Azora Capital, also sold off its stock, about $13.3 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 11 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Fifth Third Bancorp (NASDAQ:FITB) but similarly valued. These stocks are Brookfield Infrastructure Partners L.P. (NYSE:BIP), Jacobs Engineering Group Inc. (NYSE:J), KB Financial Group, Inc. (NYSE:KB), and IDEX Corporation (NYSE:IEX). All of these stocks’ market caps are similar to FITB’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BIP 14 55630 3
J 28 995596 -7
KB 7 37837 2
IEX 33 535440 10
Average 20.5 406126 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $406 million. That figure was $384 million in FITB’s case. IDEX Corporation (NYSE:IEX) is the most popular stock in this table. On the other hand KB Financial Group, Inc. (NYSE:KB) is the least popular one with only 7 bullish hedge fund positions. Fifth Third Bancorp (NASDAQ:FITB) is not the most popular stock in this group but hedge fund interest is still above average. 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 still beat the market by 15.5 percentage points. Hedge funds were also right about betting on FITB as the stock returned 31.7% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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