Do Hedge Funds Love American Equity Investment Life Holding Company (AEL)?

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 American Equity Investment Life Holding Company (NYSE:AEL) and determine whether hedge funds had an edge regarding this stock.

American Equity Investment Life Holding Company (NYSE:AEL) shareholders have witnessed a decrease in hedge fund sentiment in recent months. AEL was in 12 hedge funds’ portfolios at the end of the first quarter of 2020. There were 17 hedge funds in our database with AEL holdings at the end of the previous quarter. Our calculations also showed that AEL 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.

In today’s marketplace there are a large number of metrics shareholders put to use to evaluate stocks. Some of the less utilized metrics are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the best picks of the elite money managers can beat their index-focused peers by a solid margin (see the details here).

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

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 peek at the new hedge fund action encompassing American Equity Investment Life Holding Company (NYSE:AEL).

How are hedge funds trading American Equity Investment Life Holding Company (NYSE:AEL)?

Heading into the second quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -29% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards AEL over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Pzena Investment Management was the largest shareholder of American Equity Investment Life Holding Company (NYSE:AEL), with a stake worth $31.2 million reported as of the end of September. Trailing Pzena Investment Management was D E Shaw, which amassed a stake valued at $3.6 million. Winton Capital Management, GLG Partners, and Citadel Investment Group 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 Quantinno Capital allocated the biggest weight to American Equity Investment Life Holding Company (NYSE:AEL), around 0.37% of its 13F portfolio. Pzena Investment Management is also relatively very bullish on the stock, setting aside 0.24 percent of its 13F equity portfolio to AEL.

Seeing as American Equity Investment Life Holding Company (NYSE:AEL) has faced bearish sentiment from hedge fund managers, it’s easy to see that there exists a select few funds that decided to sell off their positions entirely last quarter. It’s worth mentioning that Michael Kharitonov and Jon David McAuliffe’s Voleon Capital dropped the largest investment of the “upper crust” of funds tracked by Insider Monkey, totaling close to $3.7 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dropped its stock, about $3.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 5 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to American Equity Investment Life Holding Company (NYSE:AEL). These stocks are Innospec Inc. (NASDAQ:IOSP), Papa John’s International, Inc. (NASDAQ:PZZA), Merit Medical Systems, Inc. (NASDAQ:MMSI), and IGM Biosciences, Inc. (NASDAQ:IGMS). All of these stocks’ market caps are closest to AEL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IOSP 14 70798 -4
PZZA 29 251238 1
MMSI 11 195740 -6
IGMS 14 517563 2
Average 17 258835 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $259 million. That figure was $43 million in AEL’s case. Papa John’s International, Inc. (NASDAQ:PZZA) is the most popular stock in this table. On the other hand Merit Medical Systems, Inc. (NASDAQ:MMSI) is the least popular one with only 11 bullish hedge fund positions. American Equity Investment Life Holding Company (NYSE:AEL) is not the least popular stock in this group but hedge fund interest is still below 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 and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on AEL as the stock returned 31.4% during the second quarter and outperformed the market by an even larger margin.

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