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Did Hedge Funds Make The Right Call On Synchrony Financial (SYF) ?

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 Synchrony Financial (NYSE:SYF) and determine whether hedge funds skillfully traded this stock.

Synchrony Financial (NYSE:SYF) was in 37 hedge funds’ portfolios at the end of the first quarter of 2020. SYF shareholders have witnessed a decrease in hedge fund interest lately. There were 44 hedge funds in our database with SYF holdings at the end of the previous quarter. Our calculations also showed that SYF 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.

Frank Brosens Taconic Capital

Frank Brosens of Taconic Capital

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 take a look at the fresh hedge fund action regarding Synchrony Financial (NYSE:SYF).

How are hedge funds trading Synchrony Financial (NYSE:SYF)?

Heading into the second quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -16% from one quarter earlier. On the other hand, there were a total of 45 hedge funds with a bullish position in SYF a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Warren Buffett’s Berkshire Hathaway has the most valuable position in Synchrony Financial (NYSE:SYF), worth close to $323.9 million, comprising 0.2% of its total 13F portfolio. The second most bullish fund manager is Cliff Asness of AQR Capital Management, with a $206 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Remaining peers with similar optimism consist of John Smith Clark’s Southpoint Capital Advisors, Paul Reeder and Edward Shapiro’s PAR Capital Management and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position PAR Capital Management allocated the biggest weight to Synchrony Financial (NYSE:SYF), around 3.42% of its 13F portfolio. Southpoint Capital Advisors is also relatively very bullish on the stock, designating 3.2 percent of its 13F equity portfolio to SYF.

Because Synchrony Financial (NYSE:SYF) has faced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there is a sect of hedgies that decided to sell off their entire stakes heading into Q4. Intriguingly, Seth Klarman’s Baupost Group said goodbye to the largest stake of all the hedgies watched by Insider Monkey, comprising about $108.2 million in stock, and Louis Bacon’s Moore Global Investments was right behind this move, as the fund said goodbye to about $34.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 7 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Synchrony Financial (NYSE:SYF) but similarly valued. We will take a look at Moderna, Inc. (NASDAQ:MRNA), Tractor Supply Company (NASDAQ:TSCO), Teva Pharmaceutical Industries Limited (NYSE:TEVA), and Freeport-McMoRan Inc. (NYSE:FCX). This group of stocks’ market caps match SYF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MRNA 25 424500 13
TSCO 37 510015 -7
TEVA 29 866697 6
FCX 42 770016 -13
Average 33.25 642807 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $643 million. That figure was $1012 million in SYF’s case. Freeport-McMoRan Inc. (NYSE:FCX) is the most popular stock in this table. On the other hand Moderna, Inc. (NASDAQ:MRNA) is the least popular one with only 25 bullish hedge fund positions. Synchrony Financial (NYSE:SYF) 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 SYF as the stock returned 39.3% 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.