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Do Hedge Funds Love Diageo plc (DEO)?

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 15 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 19.7% during the first 2.5 months of 2019 (vs. 13.1% gain for SPY), with 93% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Diageo plc (NYSE:DEO).

Diageo plc (NYSE:DEO) was in 14 hedge funds’ portfolios at the end of the fourth quarter of 2018. DEO investors should be aware of a decrease in hedge fund interest lately. There were 15 hedge funds in our database with DEO holdings at the end of the previous quarter. Our calculations also showed that DEO isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

GAMCO Investors, Mario Gabelli

Let’s analyze the latest hedge fund action surrounding Diageo plc (NYSE:DEO).

What does the smart money think about Diageo plc (NYSE:DEO)?

At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in DEO 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.

DEO_mar2019

More specifically, Gardner Russo & Gardner was the largest shareholder of Diageo plc (NYSE:DEO), with a stake worth $269.8 million reported as of the end of September. Trailing Gardner Russo & Gardner was Markel Gayner Asset Management, which amassed a stake valued at $191.4 million. Renaissance Technologies, Arrowstreet Capital, and GAMCO Investors were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as Diageo plc (NYSE:DEO) has experienced falling interest from the entirety of the hedge funds we track, it’s easy to see that there exists a select few fund managers that slashed their positions entirely by the end of the third quarter. Intriguingly, Ilan Assouline’s Circle Road Advisors dropped the largest stake of the 700 funds tracked by Insider Monkey, valued at an estimated $3.2 million in stock, and Michael Platt and William Reeves’s BlueCrest Capital Mgmt. was right behind this move, as the fund sold off about $0.4 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 1 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Diageo plc (NYSE:DEO) but similarly valued. These stocks are Dell Technologies Inc. (NYSE:DELL), China Petroleum & Chemical Corp (NYSE:SNP), Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR), and Bristol Myers Squibb Company (NYSE:BMY). This group of stocks’ market caps are closest to DEO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DELL 43 2170884 -18
SNP 15 237493 2
PBR 32 1757766 4
BMY 58 3871503 10
Average 37 2009412 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 37 hedge funds with bullish positions and the average amount invested in these stocks was $2009 million. That figure was $891 million in DEO’s case. Bristol Myers Squibb Company (NYSE:BMY) is the most popular stock in this table. On the other hand China Petroleum & Chemical Corp (NYSE:SNP) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Diageo plc (NYSE:DEO) is even less popular than SNP. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

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

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