Is Diageo plc (DEO) Going to Burn These Hedge Funds?

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 5.7% in the 12 months ending October 26 (including dividend payments). Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of June 2014) generated a return of 15.1% during the same 12-month period, with 53% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Diageo plc (NYSE:DEO).

Hedge fund interest in Diageo plc (NYSE:DEO) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as U.S. Bancorp (NYSE:USB), HDFC Bank Limited (NYSE:HDB), and Twenty-First Century Fox Inc (NASDAQ:FOX) to gather more data points.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 6.3% year to date (through December 3rd) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 18 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Tom Gayner

We’re going to analyze the latest hedge fund action encompassing Diageo plc (NYSE:DEO).

What does the smart money think about Diageo plc (NYSE:DEO)?

At the end of the third quarter, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, no change from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in DEO at the beginning of this year. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with DEO Positions

When looking at the institutional investors followed by Insider Monkey, Tom Russo’s Gardner Russo & Gardner has the biggest position in Diageo plc (NYSE:DEO), worth close to $280.2 million, accounting for 2% of its total 13F portfolio. Coming in second is Markel Gayner Asset Management, led by Tom Gayner, holding a $191.2 million position; 3.2% of its 13F portfolio is allocated to the stock. Remaining professional money managers that are bullish comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Jim Simons’s Renaissance Technologies and Mario Gabelli’s GAMCO Investors.

Judging by the fact that Diageo plc (NYSE:DEO) has witnessed falling interest from hedge fund managers, we can see that there were a few hedgies who were dropping their positions entirely in the third quarter. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP dropped the largest investment of all the hedgies monitored by Insider Monkey, comprising an estimated $3.4 million in stock, and Russell Lucas’s Lucas Capital Management was right behind this move, as the fund said goodbye to about $0.2 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to Diageo plc (NYSE:DEO). These stocks are U.S. Bancorp (NYSE:USB), HDFC Bank Limited (NYSE:HDB), Twenty-First Century Fox Inc (NASDAQ:FOX), and The Goldman Sachs Group, Inc. (NYSE:GS). This group of stocks’ market valuations are similar to DEO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
USB 39 7393172 9
HDB 27 990230 3
FOX 49 5335990 6
GS 57 6876991 -4
Average 43 5149096 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 43 hedge funds with bullish positions and the average amount invested in these stocks was $5.15 billion. That figure was $965 million in DEO’s case. The Goldman Sachs Group, Inc. (NYSE:GS) is the most popular stock in this table. On the other hand HDFC Bank Limited (NYSE:HDB) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Diageo plc (NYSE:DEO) is even less popular than HDB. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

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