Here is What Hedge Funds Thought About AT&T Inc. (T) Before Elliott Went Activist

Is AT&T Inc. (NYSE:T) a good investment right now? We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

AT&T Inc. (NYSE:T) investors should be aware of an increase in hedge fund interest in recent months even before Elliott Management revealed its activist position. Nevertheless, our calculations also showed that T isn’t among the 30 most popular stocks among hedge funds despite the recent increase in hedge fund sentiment towards the stock.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

Phill Gross, Adage Capital Management

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a look at the key hedge fund action encompassing AT&T Inc. (NYSE:T).

What does smart money think about AT&T Inc. (NYSE:T)?

At the end of the second quarter, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 2% from the first quarter of 2019. On the other hand, there were a total of 94 hedge funds with a bullish position in T a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with T Positions

Among these funds, Citadel Investment Group held the most valuable stake in AT&T Inc. (NYSE:T), which was worth $305.5 million at the end of the second quarter. On the second spot was Adage Capital Management which amassed $293.5 million worth of shares. Moreover, D E Shaw, D E Shaw, and Masters Capital Management were also bullish on AT&T Inc. (NYSE:T), allocating a large percentage of their portfolios to this stock.

Now, key money managers were leading the bulls’ herd. Voleon Capital, managed by Michael Kharitonov and Jon David McAuliffe, created the most valuable position in AT&T Inc. (NYSE:T). Voleon Capital had $17.9 million invested in the company at the end of the quarter. Zach Schreiber’s Point State Capital also initiated a $6.7 million position during the quarter. The other funds with brand new T positions are Perella Weinberg Partners, Carl Tiedemann and Michael Tiedemann’s TIG Advisors, and Anand Parekh’s Alyeska Investment Group.

Let’s also examine hedge fund activity in other stocks similar to AT&T Inc. (NYSE:T). These stocks are Pfizer Inc. (NYSE:PFE), Verizon Communications Inc. (NYSE:VZ), Cisco Systems, Inc. (NASDAQ:CSCO), and Chevron Corporation (NYSE:CVX). This group of stocks’ market caps are closest to T’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PFE 52 4519828 -1
VZ 54 1589094 2
CSCO 55 4201886 10
CVX 44 1689355 -9
Average 51.25 3000041 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 51.25 hedge funds with bullish positions and the average amount invested in these stocks was $3000 million. That figure was $1009 million in T’s case. Cisco Systems, Inc. (NASDAQ:CSCO) is the most popular stock in this table. On the other hand Chevron Corporation (NYSE:CVX) is the least popular one with only 44 bullish hedge fund positions. Compared to these stocks AT&T Inc. (NYSE:T) is even less popular than CVX. Hedge funds clearly dropped the ball on T as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on T as the stock returned 14.6% during the third quarter and outperformed the market by an even larger margin.

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