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Hedge Funds Cautiously Watching Diageo plc (DEO)

In this article you are going to find out whether hedge funds think Diageo plc (NYSE:DEO) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Diageo plc (NYSE:DEO) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 17 hedge funds’ portfolios at the end of March. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Sony Corporation (NYSE:SNE), T-Mobile US, Inc. (NASDAQ:TMUS), and Altria Group Inc (NYSE:MO) to gather more data points. Our calculations also showed that DEO 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.

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 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 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 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.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. 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. Now let’s review the new hedge fund action surrounding Diageo plc (NYSE:DEO).

Hedge fund activity in Diageo plc (NYSE:DEO)

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in DEO over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Markel Gayner Asset Management was the largest shareholder of Diageo plc (NYSE:DEO), with a stake worth $171.6 million reported as of the end of September. Trailing Markel Gayner Asset Management was Gardner Russo & Gardner, which amassed a stake valued at $169.8 million. GAMCO Investors, Renaissance Technologies, and Fisher 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 Markel Gayner Asset Management allocated the biggest weight to Diageo plc (NYSE:DEO), around 3.23% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, earmarking 2.63 percent of its 13F equity portfolio to DEO.

Since Diageo plc (NYSE:DEO) has experienced declining sentiment from the smart money, it’s easy to see that there were a few hedgies that slashed their positions entirely in the first quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dumped the biggest stake of the “upper crust” of funds tracked by Insider Monkey, worth about $34.9 million in stock. Lee Ainslie’s fund, Maverick Capital, also dumped its stock, about $13.8 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Diageo plc (NYSE:DEO) but similarly valued. These stocks are Sony Corporation (NYSE:SNE), T-Mobile US, Inc. (NASDAQ:TMUS), Altria Group Inc (NYSE:MO), and Mondelez International Inc (NASDAQ:MDLZ). This group of stocks’ market values match DEO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SNE 28 461322 2
TMUS 65 1645711 4
MO 46 1439983 -8
MDLZ 54 2218156 4
Average 48.25 1441293 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.25 hedge funds with bullish positions and the average amount invested in these stocks was $1441 million. That figure was $622 million in DEO’s case. T-Mobile US, Inc. (NASDAQ:TMUS) is the most popular stock in this table. On the other hand Sony Corporation (NYSE:SNE) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Diageo plc (NYSE:DEO) is even less popular than SNE. Hedge funds dodged a bullet by taking a bearish stance towards DEO. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.4% in 2020 through June 22nd but managed to beat the market by 15.9 percentage points. Unfortunately DEO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); DEO investors were disappointed as the stock returned 10.7% during the second quarter (through June 22nd) 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 so far in 2020.

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