The market has been volatile in the last few months as the Federal Reserve finalized its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q3 and the beginning of Q4. In this article, we analyze what the smart money thinks of Leidos Holdings Inc (NYSE:LDOS) and find out how it is affected by hedge funds’ moves.
Leidos Holdings Inc (NYSE:LDOS) investors should be aware of an increase in activity from the world’s largest hedge funds in recent months. LDOS was in 24 hedge funds’ portfolios at the end of September. There were 23 hedge funds in our database with LDOS holdings at the end of the previous quarter. Our calculations also showed that LDOS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Noam Gottesman of GLG Partners
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the key hedge fund action regarding Leidos Holdings Inc (NYSE:LDOS).
What have hedge funds been doing with Leidos Holdings Inc (NYSE:LDOS)?
At Q3’s end, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in LDOS over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, Southpoint Capital Advisors was the largest shareholder of Leidos Holdings Inc (NYSE:LDOS), with a stake worth $146 million reported as of the end of September. Trailing Southpoint Capital Advisors was GLG Partners, which amassed a stake valued at $63.8 million. Two Sigma Advisors, Alyeska Investment Group, and Samlyn Capital 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 Southpoint Capital Advisors allocated the biggest weight to Leidos Holdings Inc (NYSE:LDOS), around 5.52% of its portfolio. Prospector Partners is also relatively very bullish on the stock, dishing out 1.92 percent of its 13F equity portfolio to LDOS.
Consequently, some big names were breaking ground themselves. Alyeska Investment Group, managed by Anand Parekh, assembled the most outsized position in Leidos Holdings Inc (NYSE:LDOS). Alyeska Investment Group had $44.1 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also made a $1.5 million investment in the stock during the quarter. The following funds were also among the new LDOS investors: Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors, Matthew Hulsizer’s PEAK6 Capital Management, and Benjamin A. Smith’s Laurion Capital Management.
Let’s go over hedge fund activity in other stocks similar to Leidos Holdings Inc (NYSE:LDOS). These stocks are Duke Realty Corporation (NYSE:DRE), Steris Plc (NYSE:STE), Paycom Software Inc (NYSE:PAYC), and Liberty Global Plc (NASDAQ:LBTYK). All of these stocks’ market caps resemble LDOS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DRE | 16 | 170834 | -7 |
| STE | 28 | 388702 | 6 |
| PAYC | 31 | 413981 | 7 |
| LBTYK | 38 | 3404866 | 4 |
| Average | 28.25 | 1094596 | 2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $1095 million. That figure was $439 million in LDOS’s case. Liberty Global Plc (NASDAQ:LBTYK) is the most popular stock in this table. On the other hand Duke Realty Corporation (NYSE:DRE) is the least popular one with only 16 bullish hedge fund positions. Leidos Holdings Inc (NYSE:LDOS) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately LDOS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); LDOS investors were disappointed as the stock returned 5.8% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
