How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Travelers Companies Inc (NYSE:TRV) and determine whether hedge funds had an edge regarding this stock.
Travelers Companies Inc (NYSE:TRV) investors should pay attention to a decrease in activity from the world’s largest hedge funds in recent months. Travelers Companies Inc (NYSE:TRV) was in 28 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 39. There were 29 hedge funds in our database with TRV positions at the end of the first quarter. Our calculations also showed that TRV isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Tom Gayner of Markel Gayner Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a peek at the recent hedge fund action regarding Travelers Companies Inc (NYSE:TRV).
Hedge fund activity in Travelers Companies Inc (NYSE:TRV)
At Q2’s end, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the first quarter of 2020. By comparison, 26 hedge funds held shares or bullish call options in TRV a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Travelers Companies Inc (NYSE:TRV) was held by AQR Capital Management, which reported holding $170 million worth of stock at the end of September. It was followed by Polar Capital with a $77.1 million position. Other investors bullish on the company included Adage Capital Management, Two Sigma Advisors, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Discovery Capital Management allocated the biggest weight to Travelers Companies Inc (NYSE:TRV), around 2.23% of its 13F portfolio. Polar Capital is also relatively very bullish on the stock, dishing out 0.67 percent of its 13F equity portfolio to TRV.
Since Travelers Companies Inc (NYSE:TRV) has witnessed a decline in interest from the aggregate hedge fund industry, we can see that there lies a certain “tier” of hedgies who were dropping their entire stakes in the second quarter. At the top of the heap, Tom Gayner’s Markel Gayner Asset Management dropped the biggest stake of all the hedgies monitored by Insider Monkey, valued at about $31.3 million in stock, and Renaissance Technologies was right behind this move, as the fund dumped about $17.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 1 funds in the second quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Travelers Companies Inc (NYSE:TRV) but similarly valued. We will take a look at ZTO Express (Cayman) Inc. (NYSE:ZTO), Eversource Energy (NYSE:ES), Capital One Financial Corp. (NYSE:COF), Amphenol Corporation (NYSE:APH), T. Rowe Price Group, Inc. (NASDAQ:TROW), IDEXX Laboratories, Inc. (NASDAQ:IDXX), and Alcon Inc. (NYSE:ALC). All of these stocks’ market caps resemble TRV’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ZTO | 18 | 715518 | 3 |
| ES | 28 | 501377 | 2 |
| COF | 55 | 1908354 | 5 |
| APH | 42 | 1013347 | 0 |
| TROW | 34 | 337582 | 10 |
| IDXX | 40 | 417149 | 9 |
| ALC | 21 | 584000 | -4 |
| Average | 34 | 782475 | 3.6 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $782 million. That figure was $399 million in TRV’s case. Capital One Financial Corp. (NYSE:COF) is the most popular stock in this table. On the other hand ZTO Express (Cayman) Inc. (NYSE:ZTO) is the least popular one with only 18 bullish hedge fund positions. Travelers Companies Inc (NYSE:TRV) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TRV is 39.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately TRV wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); TRV investors were disappointed as the stock returned -4.5% since Q2 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.
Follow Travelers Companies Inc. (NYSE:TRV)
Follow Travelers Companies Inc. (NYSE:TRV)
Disclosure: None. This article was originally published at Insider Monkey.
