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Did Hedge Funds Make The Right Call On OneMain Holdings Inc (OMF) ?

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 OneMain Holdings Inc (NYSE:OMF) and determine whether hedge funds had an edge regarding this stock.

OneMain Holdings Inc (NYSE:OMF) has seen a decrease in hedge fund interest recently. Our calculations also showed that OMF 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.

Matthew Lindenbaum Basswood Capital

Matthew Lindenbaum of Basswood Capital

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. Keeping this in mind let’s take a gander at the recent hedge fund action regarding OneMain Holdings Inc (NYSE:OMF).

What have hedge funds been doing with OneMain Holdings Inc (NYSE:OMF)?

Heading into the second quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards OMF over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Miller Value Partners, managed by Bill Miller, holds the largest position in OneMain Holdings Inc (NYSE:OMF). Miller Value Partners has a $37.3 million position in the stock, comprising 2.4% of its 13F portfolio. Sitting at the No. 2 spot is Key Colony Management, led by Alex Lieblong, holding a $36.1 million position; 93.6% of its 13F portfolio is allocated to the company. Some other peers with similar optimism include Phill Gross and Robert Atchinson’s Adage Capital Management, Matthew Lindenbaum’s Basswood Capital and Steve Cohen’s Point72 Asset Management. In terms of the portfolio weights assigned to each position Key Colony Management allocated the biggest weight to OneMain Holdings Inc (NYSE:OMF), around 93.6% of its 13F portfolio. Basswood Capital is also relatively very bullish on the stock, designating 3.33 percent of its 13F equity portfolio to OMF.

Due to the fact that OneMain Holdings Inc (NYSE:OMF) has experienced falling interest from hedge fund managers, we can see that there is a sect of funds that slashed their full holdings last quarter. Intriguingly, Ravi Chopra’s Azora Capital dumped the largest stake of the “upper crust” of funds monitored by Insider Monkey, worth about $17.8 million in stock, and Tom Brown’s Second Curve Capital was right behind this move, as the fund dropped about $14.4 million worth. These moves are interesting, as aggregate hedge fund interest fell by 5 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as OneMain Holdings Inc (NYSE:OMF) but similarly valued. We will take a look at Synovus Financial Corp. (NYSE:SNV), Essent Group Ltd (NYSE:ESNT), TriNet Group Inc (NYSE:TNET), and II-VI, Inc. (NASDAQ:IIVI). This group of stocks’ market valuations match OMF’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SNV 33 228467 -2
ESNT 26 196484 -10
TNET 19 230192 -1
IIVI 20 99773 2
Average 24.5 188729 -2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $189 million. That figure was $221 million in OMF’s case. Synovus Financial Corp. (NYSE:SNV) is the most popular stock in this table. On the other hand TriNet Group Inc (NYSE:TNET) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks OneMain Holdings Inc (NYSE:OMF) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on OMF as the stock returned 30% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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