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Do Hedge Funds Love Moody’s Corporation (MCO)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Moody’s Corporation (NYSE:MCO).

Is Moody’s Corporation (NYSE:MCO) a healthy stock for your portfolio? Hedge funds are becoming more confident. The number of long hedge fund bets increased by 1 in recent months. Our calculations also showed that MCO 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 44 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.

David Atterbury - Whetstone Capital

David Atterbury of Whetstone Capital Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this successful trader’s “corona catalyst plays“. Also, Europe is set to become the world’s largest cannabis market, so we checked out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s check out the new hedge fund action encompassing Moody’s Corporation (NYSE:MCO).

How have hedgies been trading Moody’s Corporation (NYSE:MCO)?

At the end of the first quarter, a total of 50 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 2% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MCO over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Moody’s Corporation (NYSE:MCO) was held by Berkshire Hathaway, which reported holding $5217.7 million worth of stock at the end of September. It was followed by Akre Capital Management with a $1192.5 million position. Other investors bullish on the company included Windacre Partnership, AltaRock Partners, and Triple Frond Partners. In terms of the portfolio weights assigned to each position Rings Capital Management allocated the biggest weight to Moody’s Corporation (NYSE:MCO), around 38.41% of its 13F portfolio. Windacre Partnership is also relatively very bullish on the stock, dishing out 20.29 percent of its 13F equity portfolio to MCO.

With a general bullishness amongst the heavyweights, specific money managers have jumped into Moody’s Corporation (NYSE:MCO) headfirst. Select Equity Group, managed by Robert Joseph Caruso, established the most valuable position in Moody’s Corporation (NYSE:MCO). Select Equity Group had $73 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $30.8 million position during the quarter. The following funds were also among the new MCO investors: Paul Marshall and Ian Wace’s Marshall Wace LLP, Brett Huckelbridge’s Steel Canyon Capital, and David Atterbury’s Whetstone Capital Advisors.

Let’s now review hedge fund activity in other stocks similar to Moody’s Corporation (NYSE:MCO). These stocks are American Electric Power Company, Inc. (NYSE:AEP), Waste Management, Inc. (NYSE:WM), Edwards Lifesciences Corporation (NYSE:EW), and L3Harris Technologies, Inc. (NYSE:LHX). This group of stocks’ market values are closest to MCO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AEP 38 1070882 4
WM 40 2563267 8
EW 49 1405375 4
LHX 43 1593570 -5
Average 42.5 1658274 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.5 hedge funds with bullish positions and the average amount invested in these stocks was $1658 million. That figure was $8553 million in MCO’s case. Edwards Lifesciences Corporation (NYSE:EW) is the most popular stock in this table. On the other hand American Electric Power Company, Inc. (NYSE:AEP) is the least popular one with only 38 bullish hedge fund positions. Compared to these stocks Moody’s Corporation (NYSE:MCO) 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 7.9% in 2020 through May 22nd but still managed to beat the market by 15.6 percentage points. Hedge funds were also right about betting on MCO as the stock returned 21.7% so far in Q2 (through May 22nd) 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.