We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 835 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of December 31st. In this article we look at what those investors think of Northrop Grumman Corporation (NYSE:NOC).
Northrop Grumman Corporation (NYSE:NOC) was in 44 hedge funds’ portfolios at the end of the fourth quarter of 2019. NOC has seen a decrease in hedge fund sentiment lately. There were 46 hedge funds in our database with NOC holdings at the end of the previous quarter. Our calculations also showed that NOC isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 S&P 500 ETFs by more than 41 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a peek at the latest hedge fund action encompassing Northrop Grumman Corporation (NYSE:NOC).
Hedge fund activity in Northrop Grumman Corporation (NYSE:NOC)
Heading into the first quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the third quarter of 2019. On the other hand, there were a total of 29 hedge funds with a bullish position in NOC a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Northrop Grumman Corporation (NYSE:NOC), with a stake worth $368.9 million reported as of the end of September. Trailing AQR Capital Management was Millennium Management, which amassed a stake valued at $153.4 million. Holocene Advisors, Alkeon Capital Management, and Renaissance Technologies 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 Ariose Capital allocated the biggest weight to Northrop Grumman Corporation (NYSE:NOC), around 7.24% of its 13F portfolio. Heard Capital is also relatively very bullish on the stock, setting aside 6.44 percent of its 13F equity portfolio to NOC.
Seeing as Northrop Grumman Corporation (NYSE:NOC) has experienced falling interest from the smart money, we can see that there were a few hedge funds that decided to sell off their entire stakes by the end of the third quarter. At the top of the heap, Aaron Cowen’s Suvretta Capital Management dumped the largest investment of the “upper crust” of funds monitored by Insider Monkey, worth about $112.4 million in stock, and Ken Heebner’s Capital Growth Management was right behind this move, as the fund said goodbye to about $43.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Northrop Grumman Corporation (NYSE:NOC) but similarly valued. These stocks are Lloyds Banking Group PLC (NYSE:LYG), Illinois Tool Works Inc. (NYSE:ITW), Prologis Inc (NYSE:PLD), and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). This group of stocks’ market valuations match NOC’s market valuation.
|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 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $1066 million. That figure was $1320 million in NOC’s case. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 5 bullish hedge fund positions. Northrop Grumman Corporation (NYSE:NOC) 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. These stocks lost 11.7% in 2020 through March 11th but still beat the market by 3.1 percentage points. Hedge funds were also right about betting on NOC as the stock returned -7.3% during the first quarter (through March 11th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.