We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Morgan Stanley (NYSE:MS) and determine whether hedge funds skillfully traded this stock.
Morgan Stanley (NYSE:MS) was in 61 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 70. MS shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. There were 70 hedge funds in our database with MS positions at the end of the first quarter. Our calculations also showed that MS 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.
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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s analyze the key hedge fund action regarding Morgan Stanley (NYSE:MS).
How are hedge funds trading Morgan Stanley (NYSE:MS)?
At Q2’s end, a total of 61 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards MS over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Eagle Capital Management was the largest shareholder of Morgan Stanley (NYSE:MS), with a stake worth $716.3 million reported as of the end of September. Trailing Eagle Capital Management was ValueAct Capital, which amassed a stake valued at $688.3 million. Greenhaven Associates, Fisher Asset Management, and Pzena Investment 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 Greenhaven Associates allocated the biggest weight to Morgan Stanley (NYSE:MS), around 10.15% of its 13F portfolio. Toscafund Asset Management is also relatively very bullish on the stock, designating 9.77 percent of its 13F equity portfolio to MS.
Due to the fact that Morgan Stanley (NYSE:MS) has faced bearish sentiment from hedge fund managers, it’s safe to say that there was a specific group of funds that elected to cut their entire stakes last quarter. Interestingly, Louis Bacon’s Moore Global Investments dropped the biggest investment of all the hedgies tracked by Insider Monkey, worth about $31.1 million in stock. John Overdeck and David Siegel’s fund, Two Sigma Advisors, also dumped its stock, about $27.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 9 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Morgan Stanley (NYSE:MS) but similarly valued. We will take a look at Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF), Mondelez International Inc (NASDAQ:MDLZ), Altria Group Inc (NYSE:MO), Zoom Video Communications, Inc. (NASDAQ:ZM), Becton, Dickinson and Company (NYSE:BDX), and Rio Tinto Group (NYSE:RIO). This group of stocks’ market caps are closest to MS’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 39.6 hedge funds with bullish positions and the average amount invested in these stocks was $2539 million. That figure was $4357 million in MS’s case. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is the most popular stock in this table. On the other hand Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Morgan Stanley (NYSE:MS) is more popular among hedge funds. Our overall hedge fund sentiment score for MS is 72.1. 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. 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 28.2% in 2020 through August 24th and still beat the market by 20.6 percentage points. Unfortunately MS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MS were disappointed as the stock returned 9.2% since the end of the second quarter 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.
Disclosure: None. This article was originally published at Insider Monkey.