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Hedge Funds Downgraded Telefonica S.A. (TEF) To A “Sell”

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Telefonica S.A. (NYSE:TEF) based on that data.

Telefonica S.A. (NYSE:TEF) has seen a decrease in activity from the world’s largest hedge funds in recent months. Our calculations also showed that TEF 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.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. 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. With all of this in mind let’s review the latest hedge fund action encompassing Telefonica S.A. (NYSE:TEF).

What does smart money think about Telefonica S.A. (NYSE:TEF)?

At Q1’s end, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -22% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TEF over the last 18 quarters. 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, Arrowstreet Capital was the largest shareholder of Telefonica S.A. (NYSE:TEF), with a stake worth $13.1 million reported as of the end of September. Trailing Arrowstreet Capital was Renaissance Technologies, which amassed a stake valued at $1.5 million. Citadel Investment Group, Two Sigma Advisors, and Balyasny 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 Arrowstreet Capital allocated the biggest weight to Telefonica S.A. (NYSE:TEF), around 0.04% of its 13F portfolio. Engineers Gate Manager is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to TEF.

Due to the fact that Telefonica S.A. (NYSE:TEF) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there exists a select few funds who sold off their full holdings in the first quarter. At the top of the heap, Steve Cohen’s Point72 Asset Management dropped the largest stake of the 750 funds followed by Insider Monkey, comprising close to $1.6 million in stock. Mike Vranos’s fund, Ellington, also said goodbye to its stock, about $0.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Telefonica S.A. (NYSE:TEF) but similarly valued. We will take a look at The Kroger Co. (NYSE:KR), Phillips 66 (NYSE:PSX), NXP Semiconductors NV (NASDAQ:NXPI), and Veeva Systems Inc (NYSE:VEEV). All of these stocks’ market caps are similar to TEF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KR 43 1581591 12
PSX 43 420207 -3
NXPI 52 1234255 -28
VEEV 33 352902 -11
Average 42.75 897239 -7.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.75 hedge funds with bullish positions and the average amount invested in these stocks was $897 million. That figure was $17 million in TEF’s case. NXP Semiconductors NV (NASDAQ:NXPI) is the most popular stock in this table. On the other hand Veeva Systems Inc (NYSE:VEEV) is the least popular one with only 33 bullish hedge fund positions. Compared to these stocks Telefonica S.A. (NYSE:TEF) is even less popular than VEEV. Hedge funds dodged a bullet by taking a bearish stance towards TEF. 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 13.9% in 2020 through June 10th but managed to beat the market by 14.2 percentage points. Unfortunately TEF wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); TEF investors were disappointed as the stock returned 19% during the second quarter (through June 10th) 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.