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Hedge Funds Never Been Less Bullish On Prudential Financial Inc (PRU)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Prudential Financial Inc (NYSE:PRU) and determine whether the smart money was really smart about this stock.

Is Prudential Financial Inc (NYSE:PRU) undervalued? Investors who are in the know were turning less bullish. The number of bullish hedge fund bets were cut by 2 lately. Prudential Financial Inc (NYSE:PRU) was in 26 hedge funds’ portfolios at the end of June. The all time high for this statistics is 39. Our calculations also showed that PRU 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Phill Gross Adage Capital Phillip Gross

Phillip Gross of Adage Capital

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 let’s review the key hedge fund action regarding Prudential Financial Inc (NYSE:PRU).

What have hedge funds been doing with Prudential Financial Inc (NYSE:PRU)?

At the end of June, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in PRU over the last 20 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 Prudential Financial Inc (NYSE:PRU), with a stake worth $242.9 million reported as of the end of September. Trailing Arrowstreet Capital was Two Sigma Advisors, which amassed a stake valued at $58.5 million. Citadel Investment Group, Adage Capital Management, and AQR Capital 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 Pittencrieff Partners – Gabalex Capital allocated the biggest weight to Prudential Financial Inc (NYSE:PRU), around 2.88% of its 13F portfolio. Invenomic Capital Management is also relatively very bullish on the stock, setting aside 1.75 percent of its 13F equity portfolio to PRU.

Judging by the fact that Prudential Financial Inc (NYSE:PRU) has witnessed falling interest from hedge fund managers, it’s easy to see that there were a few funds that slashed their positions entirely heading into Q3. At the top of the heap, Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors dropped the biggest position of the 750 funds followed by Insider Monkey, comprising an estimated $5.9 million in stock. Ron Bobman’s fund, Capital Returns Management, also cut its stock, about $5.2 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 2 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Prudential Financial Inc (NYSE:PRU) but similarly valued. We will take a look at Consolidated Edison, Inc. (NYSE:ED), Valero Energy Corporation (NYSE:VLO), Xilinx, Inc. (NASDAQ:XLNX), TransDigm Group Incorporated (NYSE:TDG), McCormick & Company, Incorporated (NYSE:MKC), Verisign, Inc. (NASDAQ:VRSN), and Moderna, Inc. (NASDAQ:MRNA). This group of stocks’ market valuations match PRU’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ED 31 714139 6
VLO 39 157343 -6
XLNX 47 1054542 9
TDG 62 6065530 4
MKC 32 251773 1
VRSN 47 6245654 6
MRNA 37 788433 12
Average 42.1 2182488 4.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.1 hedge funds with bullish positions and the average amount invested in these stocks was $2182 million. That figure was $437 million in PRU’s case. TransDigm Group Incorporated (NYSE:TDG) is the most popular stock in this table. On the other hand Consolidated Edison, Inc. (NYSE:ED) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Prudential Financial Inc (NYSE:PRU) is even less popular than ED. Our overall hedge fund sentiment score for PRU is 14.9. 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. Hedge funds dodged a bullet by taking a bearish stance towards PRU. 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 21.3% in 2020 through September 25th but managed to beat the market by 17.7 percentage points. Unfortunately PRU wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); PRU investors were disappointed as the stock returned 3.6% since the end of Q2 (through 9/25) 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.