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General Dynamics Corporation (GD): Are Hedge Funds Right About This Stock?

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 (see why hell is coming). 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 General Dynamics Corporation (NYSE:GD) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is General Dynamics Corporation (NYSE:GD) worth your attention right now? Money managers were getting less optimistic. The number of bullish hedge fund positions were trimmed by 7 in recent months. Our calculations also showed that GD 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). GD was in 39 hedge funds’ portfolios at the end of the first quarter of 2020. There were 46 hedge funds in our database with GD holdings at the end of the previous quarter.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to take a gander at the key hedge fund action regarding General Dynamics Corporation (NYSE:GD).

What does smart money think about General Dynamics Corporation (NYSE:GD)?

At the end of the first quarter, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from the fourth quarter of 2019. By comparison, 42 hedge funds held shares or bullish call options in GD a year ago. 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, Longview Asset Management was the largest shareholder of General Dynamics Corporation (NYSE:GD), with a stake worth $4262 million reported as of the end of September. Trailing Longview Asset Management was Farallon Capital, which amassed a stake valued at $275.7 million. Citadel Investment Group, AQR Capital Management, and Markel Gayner Asset 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 Longview Asset Management allocated the biggest weight to General Dynamics Corporation (NYSE:GD), around 95.25% of its 13F portfolio. Farallon Capital is also relatively very bullish on the stock, earmarking 2.41 percent of its 13F equity portfolio to GD.

Because General Dynamics Corporation (NYSE:GD) has experienced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few hedge funds who sold off their positions entirely heading into Q4. At the top of the heap, Robert Bishop’s Impala Asset Management sold off the largest investment of the “upper crust” of funds tracked by Insider Monkey, totaling about $57.5 million in stock, and Paul Tudor Jones’s Tudor Investment Corp was right behind this move, as the fund said goodbye to about $6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 7 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as General Dynamics Corporation (NYSE:GD) but similarly valued. These stocks are Aon plc (NYSE:AON), Dollar General Corp. (NYSE:DG), Ferrari N.V. (NYSE:RACE), and Norfolk Southern Corp. (NYSE:NSC). All of these stocks’ market caps match GD’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AON 47 2705439 -4
DG 60 2102704 10
RACE 29 1729509 -7
NSC 51 1172825 -1
Average 46.75 1927619 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 46.75 hedge funds with bullish positions and the average amount invested in these stocks was $1928 million. That figure was $5111 million in GD’s case. Dollar General Corp. (NYSE:DG) is the most popular stock in this table. On the other hand Ferrari N.V. (NYSE:RACE) is the least popular one with only 29 bullish hedge fund positions. General Dynamics Corporation (NYSE:GD) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 surpassed the market by 15.5 percentage points. Unfortunately GD wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); GD investors were disappointed as the stock returned 13.9% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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