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How Bank of America and Other Hedge Fund Favorites Performed in Q2

Insider Monkey tracks hedge funds, billionaires, and prominent value investors for a very simple reason: their consensus picks generally outperform the market. We aren’t the only research shop broadcasting this fact using a bullhorn. Here is what strategist Ben Snider said in Goldman Sachs’ periodic hedge fund report:

“Despite the strong track record of popular hedge fund stocks, investors often view high ownership as a negative trait when evaluating stock prospects. Clients often ask us to include hedge fund ownership data in stock screens, expressing a preference for buying ‘under-owned’ stocks.”

“In fact, during the past decade hedge fund popularity has been a more useful criterion for selecting stocks than valuations…. The signals from hedge fund popularity and valuation have been particularly useful in combination, especially for investors with slightly longer investment horizons. During the past decade, popular stocks have generally outperformed unpopular stocks across both 3- and 12-month investment horizons” Snider concluded.

It may sound like I am tooting my own horn, but Insider Monkey’s quarterly newsletter is actually superior to Goldman’s report. That’s because we separated the hedge fund favorites into long and short buckets. Our long bucket of hedge fund favorites returned 34.1% in the first half of 2019, whereas our short bucket of hedge fund favorites gained 21.4% during the same period. Hedge funds’ favorite top 20 stocks, on the other hand, returned 24% so far in 2019. You could have beaten the S&P 500 Index funds by 5.7 percentage points by investing in hedge funds’ top 20 picks in 2019, whereas you could have outperformed the index funds by 15.8 percentage points if you invested in our top hedge fund picks. You can try out our newsletter free of charge for 14 days to see hedge funds’ latest best stock picks.

The #1 most popular stock among the 743 hedge funds tracked by Insider Monkey was Bank of America Corporation (NYSE:BAC). Bank of America was also the 11th most popular stock among hedge funds at the end of December (see the 30 most popular stocks among hedge funds).

Warren Buffett

Warren Buffett

We have to warn you against indiscriminately imitating hedge funds’ all stock picks. Hedge funds’ top 20 stock picks outperformed the S&P 500 Index funds by 5.7 percentage points this year, but hedge funds’ top 500 stock picks had the same return as the S&P 500 Index this quarter. Investing in a hedge fund’s 35th best idea doesn’t give you the same return as investing in a hedge fund’s best idea.

We’re going to take a look at the recent hedge fund action regarding Bank of America Corporation (NYSE:BAC).

What does smart money think about Bank of America Corporation (NYSE:BAC)?

At Q1’s end, a total of 96 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the previous quarter. The graph below displays the number of hedge funds with bullish position in BAC over the last 15 quarters. With hedge funds’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

BAC_may2019

Among these funds, Berkshire Hathaway held the most valuable stake in Bank of America Corporation (NYSE:BAC), which was worth $24725.3 million at the end of the first quarter. On the second spot was Theleme Partners which amassed $499.8 million worth of shares. Moreover, Pzena Investment Management, First Pacific Advisors LLC, and Darsana Capital Partners were also bullish on Bank of America Corporation (NYSE:BAC), allocating a large percentage of their portfolios to this stock.

Due to the fact that Bank of America Corporation (NYSE:BAC) has experienced bearish sentiment from the smart money, logic holds that there lies a certain “tier” of fund managers that slashed their entire stakes heading into Q3. Interestingly, Richard Chilton’s Chilton Investment Company sold off the largest investment of all the hedgies followed by Insider Monkey, comprising about $74.4 million in stock. Matthew Knauer and Mina Faltas’s fund, Nokota Management, also dropped its stock, about $73.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds heading into Q3.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Bank of America Corporation (NYSE:BAC) but similarly valued. We will take a look at The Procter & Gamble Company (NYSE:PG), Verizon Communications Inc. (NYSE:VZ), Mastercard Incorporated (NYSE:MA), and Intel Corporation (NASDAQ:INTC). This group of stocks’ market caps match BAC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PG 56 9567973 -4
VZ 52 1472781 -10
MA 94 11561189 -2
INTC 62 4307809 -3
Average 66 6727438 -4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 66 hedge funds with bullish positions and the average amount invested in these stocks was $6727 million. That figure was $29064 million in BAC’s case. Mastercard Incorporated (NYSE:MA) is the most popular stock in this table. On the other hand Verizon Communications Inc. (NYSE:VZ) is the least popular one with only 52 bullish hedge fund positions. Compared to these stocks Bank of America Corporation (NYSE:BAC) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.4% in Q2 and outperformed the S&P 500 ETF (SPY) by more than 2 percentage points. Hedge funds were also right about betting on BAC, though not to the same extent, as the stock returned 5.7% during the same period and outperformed the market as well.

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

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