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How Did Legg Mason, Inc. (LM) Perform In Comparison to Hedge Fund Favorites in 2019?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Legg Mason, Inc. (NYSE:LM) and compare its performance to hedge funds’ consensus picks in 2019.

Legg Mason, Inc. (NYSE:LM) has seen an increase in enthusiasm from smart money in recent months. Our calculations also showed that LM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 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 has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

TRIAN PARTNERS

Nelson Peltz of Trian Partners

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we’re going to check out the latest hedge fund action encompassing Legg Mason, Inc. (NYSE:LM).

What have hedge funds been doing with Legg Mason, Inc. (NYSE:LM)?

Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 39% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in LM over the last 17 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is LM A Good Stock To Buy?

The largest stake in Legg Mason, Inc. (NYSE:LM) was held by Trian Partners, which reported holding $148.2 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $83.2 million position. Other investors bullish on the company included GAMCO Investors, Renaissance Technologies, and Millennium Management. In terms of the portfolio weights assigned to each position Factorial Partners allocated the biggest weight to Legg Mason, Inc. (NYSE:LM), around 1.64% of its 13F portfolio. Trian Partners is also relatively very bullish on the stock, setting aside 1.55 percent of its 13F equity portfolio to LM.

Now, key money managers were breaking ground themselves. Azora Capital, managed by Ravi Chopra, initiated the most outsized position in Legg Mason, Inc. (NYSE:LM). Azora Capital had $3 million invested in the company at the end of the quarter. David E. Shaw’s D E Shaw also made a $2.8 million investment in the stock during the quarter. The other funds with brand new LM positions are Sander Gerber’s Hudson Bay Capital Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Phill Gross and Robert Atchinson’s Adage Capital Management.

Let’s also examine hedge fund activity in other stocks similar to Legg Mason, Inc. (NYSE:LM). We will take a look at The Timken Company (NYSE:TKR), Cedar Fair, L.P. (NYSE:FUN), ICU Medical, Inc. (NASDAQ:ICUI), and NuVasive, Inc. (NASDAQ:NUVA). All of these stocks’ market caps are similar to LM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TKR 26 208170 0
FUN 13 99639 5
ICUI 15 234605 0
NUVA 21 253261 -3
Average 18.75 198919 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $199 million. That figure was $466 million in LM’s case. The Timken Company (NYSE:TKR) is the most popular stock in this table. On the other hand Cedar Fair, L.P. (NYSE:FUN) is the least popular one with only 13 bullish hedge fund positions. Legg Mason, Inc. (NYSE:LM) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on LM as the stock returned 47.3% in 2019 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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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