How do you pick the next stock to invest in? One way would be to spend hours 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 generate strong returns after adjusting for known risk factors.
With that in mind, let’s take a look at five stocks hedge funds piled into in the third quarter. They are Mondelez International Inc (NASDAQ:MDLZ), Citizens Financial Group Inc (NYSE:CFG), J M Smucker Co (NYSE:SJM), Priceline Group Inc (NASDAQ:PCLN), and Alphabet Inc (NASDAQ:GOOGL).
#5 J M Smucker Co (NYSE:SJM)
Number of Hedge Fund Holders (as of September 30): 47
Total Value of Hedge Fund Holdings (as of September 30): $1.58 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 11.50%
47 hedge funds were long J M Smucker Co (NYSE:SJM) at the end of the third quarter, up from 30 hedge funds long the stock three months earlier. The branded foods manufacturer reported excellent second quarter of fiscal year 2016 results, with EPS of $1.62, beating estimates by $0.11 per share. Adjusted gross margin increased 2by two percentage points to 37.7%. Because of the strong results and the company’s reasonable forward P/E of 19, J M Smucker Co shares are up by over 23% year-to-date. Daniel S. Och’s OZ Management established a new position of 2.76 million shares in J M Smucker during the quarter.
Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
#4 Citizens Financial Group Inc (NYSE:CFG)
Number of Hedge Fund Holders (as of September 30): 56
Total Value of Hedge Fund Holdings (as of September 30): $1.55 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 12.30%
Given that Citizens Financial Group Inc (NYSE:CFG)’s EPS will increase as interest rates normalize, it’s not surprising that the total number of hedge funds long the stock increased by 18 to 56 in the third quarter. Among the hedge funds that established new positions were Ken Griffin‘s Citadel Investment Group, which purchased 10.65 million shares, and Brian Jackelow‘s SAB Capital Management, which added a new stake of 4.4 million shares of Citizens Financial Group into its portfolio. Although shares are up by 6.8% year-to-date, Citizens Financial Group has more room to rally given the bank’s modest 0.72 price-to-book ratio.