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Did Hedge Funds Make The Right Call On Legg Mason, Inc. (LM) ?

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 Legg Mason, Inc. (NYSE:LM) and determine whether hedge funds skillfully traded this stock.

Legg Mason, Inc. (NYSE:LM) investors should pay attention to an increase in hedge fund sentiment in recent months. Our calculations also showed that LM 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.

At the moment there are many signals shareholders use to assess publicly traded companies. Two of the best signals are hedge fund and insider trading activity. Our researchers have shown that, historically, those who follow the top picks of the best money managers can beat the market by a solid margin (see the details here).

Ken Fisher FISHER ASSET MANAGEMENT

Ken Fisher of Fisher Asset 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 let’s review the latest hedge fund action regarding Legg Mason, Inc. (NYSE:LM).

Hedge fund activity in Legg Mason, Inc. (NYSE:LM)

At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in LM 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.

Is LM A Good Stock To Buy?

More specifically, Trian Partners was the largest shareholder of Legg Mason, Inc. (NYSE:LM), with a stake worth $189.6 million reported as of the end of September. Trailing Trian Partners was Renaissance Technologies, which amassed a stake valued at $120.9 million. Pentwater Capital Management, Carlson Capital, and Water Island 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 White Square Capital allocated the biggest weight to Legg Mason, Inc. (NYSE:LM), around 5.62% of its 13F portfolio. Water Island Capital is also relatively very bullish on the stock, earmarking 5.31 percent of its 13F equity portfolio to LM.

As industrywide interest jumped, some big names were leading the bulls’ herd. Pentwater Capital Management, managed by Matthew Halbower, created the most valuable position in Legg Mason, Inc. (NYSE:LM). Pentwater Capital Management had $95.2 million invested in the company at the end of the quarter. Clint Carlson’s Carlson Capital also initiated a $95.1 million position during the quarter. The other funds with new positions in the stock are John Orrico’s Water Island Capital, Robert Emil Zoellner’s Alpine Associates, and Carl Tiedemann and Michael Tiedemann’s TIG Advisors.

Let’s now take a look at hedge fund activity in other stocks similar to Legg Mason, Inc. (NYSE:LM). These stocks are Flex Ltd. (NASDAQ:FLEX), First Industrial Realty Trust, Inc. (NYSE:FR), Planet Fitness Inc (NYSE:PLNT), and Axon Enterprise, Inc. (NASDAQ:AAXN). All of these stocks’ market caps are closest to LM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FLEX 24 801436 -10
FR 24 215043 5
PLNT 44 804544 10
AAXN 26 413473 1
Average 29.5 558624 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $559 million. That figure was $944 million in LM’s case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand Flex Ltd. (NASDAQ:FLEX) is the least popular one with only 24 bullish hedge fund positions. Legg Mason, Inc. (NYSE:LM) 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 LM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LM were disappointed as the stock returned 2.7% 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.