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Do Hedge Funds Love Brown & Brown, Inc. (BRO)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Brown & Brown, Inc. (NYSE:BRO).

Is Brown & Brown, Inc. (NYSE:BRO) a buy here? The best stock pickers are getting less optimistic. The number of bullish hedge fund bets retreated by 8 recently. Our calculations also showed that BRO isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

RENAISSANCE TECHNOLOGIES

Jim Simons of Renaissance Technologies

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to check out the key hedge fund action encompassing Brown & Brown, Inc. (NYSE:BRO).

How have hedgies been trading Brown & Brown, Inc. (NYSE:BRO)?

At Q4’s end, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -26% from the third quarter of 2019. On the other hand, there were a total of 20 hedge funds with a bullish position in BRO a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is BRO A Good Stock To Buy?

Among these funds, Select Equity Group held the most valuable stake in Brown & Brown, Inc. (NYSE:BRO), which was worth $430.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $73.5 million worth of shares. Diamond Hill Capital, Arrowstreet Capital, and Millennium Management 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 Prospector Partners allocated the biggest weight to Brown & Brown, Inc. (NYSE:BRO), around 4.34% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, designating 2.72 percent of its 13F equity portfolio to BRO.

Since Brown & Brown, Inc. (NYSE:BRO) has faced falling interest from the smart money, it’s safe to say that there exists a select few funds who were dropping their positions entirely last quarter. Interestingly, Michael Gelband’s ExodusPoint Capital dropped the biggest investment of the “upper crust” of funds watched by Insider Monkey, totaling about $17.4 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dropped about $9.7 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 8 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Brown & Brown, Inc. (NYSE:BRO). These stocks are Melco Resorts & Entertainment Limited (NASDAQ:MLCO), Carlyle Group LP (NASDAQ:CG), Advance Auto Parts, Inc. (NYSE:AAP), and WestRock Company (NYSE:WRK). This group of stocks’ market caps resemble BRO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MLCO 35 836262 8
CG 13 213484 5
AAP 42 1621720 1
WRK 35 765253 3
Average 31.25 859180 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $859 million. That figure was $703 million in BRO’s case. Advance Auto Parts, Inc. (NYSE:AAP) is the most popular stock in this table. On the other hand Carlyle Group LP (NASDAQ:CG) is the least popular one with only 13 bullish hedge fund positions. Brown & Brown, Inc. (NYSE:BRO) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on BRO as the stock returned -6.1% during the same time period and outperformed the market by an even larger margin.

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

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