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Hedge Funds Were Selling Jefferies Financial Group Inc. (JEF) Before The Coronavirus

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We at Insider Monkey have gone over 835 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of December 31st. In this article, we look at what those funds think of Jefferies Financial Group Inc. (NYSE:JEF) based on that data.

Jefferies Financial Group Inc. (NYSE:JEF) has experienced a decrease in support from the world’s most elite money managers recently. JEF was in 31 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 34 hedge funds in our database with JEF holdings at the end of the previous quarter. Our calculations also showed that JEF isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to analyze the latest hedge fund action regarding Jefferies Financial Group Inc. (NYSE:JEF).

How have hedgies been trading Jefferies Financial Group Inc. (NYSE:JEF)?

At Q4’s end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the previous quarter. By comparison, 36 hedge funds held shares or bullish call options in JEF a year ago. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, holds the largest position in Jefferies Financial Group Inc. (NYSE:JEF). First Pacific Advisors LLC has a $436.1 million position in the stock, comprising 4.1% of its 13F portfolio. On First Pacific Advisors LLC’s heels is Allan Mecham of Arlington Value Capital, with a $85.3 million position; the fund has 5.8% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism encompass Amit Wadhwaney’s Moerus Capital Management, Gregg J. Powers’s Private Capital Management and Scott Wallace’s Wallace Capital Management. In terms of the portfolio weights assigned to each position Moerus Capital Management allocated the biggest weight to Jefferies Financial Group Inc. (NYSE:JEF), around 12.81% of its 13F portfolio. Pacifica Capital Investments is also relatively very bullish on the stock, earmarking 10.08 percent of its 13F equity portfolio to JEF.

Because Jefferies Financial Group Inc. (NYSE:JEF) has experienced a decline in interest from hedge fund managers, it’s easy to see that there is a sect of hedgies that slashed their entire stakes heading into Q4. Interestingly, D. E. Shaw’s D E Shaw dropped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $5.3 million in stock. Donald Sussman’s fund, Paloma Partners, also cut its stock, about $1.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 3 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to Jefferies Financial Group Inc. (NYSE:JEF). We will take a look at Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR), Nordstrom, Inc. (NYSE:JWN), Jabil Inc. (NYSE:JBL), and Pegasystems Inc. (NASDAQ:PEGA). All of these stocks’ market caps are similar to JEF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ARWR 26 259366 11
JWN 30 159760 7
JBL 34 641843 0
PEGA 25 1051106 -1
Average 28.75 528019 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $528 million. That figure was $720 million in JEF’s case. Jabil Inc. (NYSE:JBL) is the most popular stock in this table. On the other hand Pegasystems Inc. (NASDAQ:PEGA) is the least popular one with only 25 bullish hedge fund positions. Jefferies Financial Group Inc. (NYSE:JEF) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately JEF wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on JEF were disappointed as the stock returned -28.4% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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