Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Verizon Communications Inc. (NYSE:VZ)? The smart money sentiment can provide an answer to this question.
Is Verizon Communications Inc. (NYSE:VZ) a good stock to buy now? Hedge funds were taking a bearish view. The number of bullish hedge fund bets dropped by 3 recently. Verizon Communications Inc. (NYSE:VZ) was in 65 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 68. Our calculations also showed that VZ isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: 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 66 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.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Keeping this in mind let’s review the key hedge fund action surrounding Verizon Communications Inc. (NYSE:VZ).
Hedge fund activity in Verizon Communications Inc. (NYSE:VZ)
At the end of September, a total of 65 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in VZ over the last 21 quarters. With the smart money’s capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
More specifically, D E Shaw was the largest shareholder of Verizon Communications Inc. (NYSE:VZ), with a stake worth $439.3 million reported as of the end of September. Trailing D E Shaw was Skye Global Management, which amassed a stake valued at $365.3 million. Two Sigma Advisors, AQR Capital Management, and Adage Capital Management 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 Voleon Capital allocated the biggest weight to Verizon Communications Inc. (NYSE:VZ), around 19.23% of its 13F portfolio. Skye Global Management is also relatively very bullish on the stock, earmarking 9.42 percent of its 13F equity portfolio to VZ.
Seeing as Verizon Communications Inc. (NYSE:VZ) has witnessed declining sentiment from hedge fund managers, it’s safe to say that there exists a select few fund managers that elected to cut their positions entirely in the third quarter. Intriguingly, Guru Ramakrishnan’s Meru Capital cut the biggest stake of the “upper crust” of funds tracked by Insider Monkey, totaling about $4.6 million in stock, and Matthew Tewksbury’s Stevens Capital Management was right behind this move, as the fund dumped about $3.3 million worth. These moves are important to note, as total hedge fund interest was cut by 3 funds in the third quarter.
Let’s now review hedge fund activity in other stocks similar to Verizon Communications Inc. (NYSE:VZ). We will take a look at Adobe Inc. (NASDAQ:ADBE), Paypal Holdings Inc (NASDAQ:PYPL), salesforce.com, inc. (NYSE:CRM), The Walt Disney Company (NYSE:DIS), Netflix, Inc. (NASDAQ:NFLX), Intel Corporation (NASDAQ:INTC), and The Coca-Cola Company (NYSE:KO). This group of stocks’ market values are similar to VZ’s market value.
|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 100.6 hedge funds with bullish positions and the average amount invested in these stocks was $11612 million. That figure was $2760 million in VZ’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand The Coca-Cola Company (NYSE:KO) is the least popular one with only 60 bullish hedge fund positions. Verizon Communications Inc. (NYSE:VZ) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for VZ is 33.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 percentage points. These stocks gained 30.7% in 2020 through November 27th and surpassed the market again by 16.1 percentage points. Unfortunately VZ wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); VZ investors were disappointed as the stock returned 2.9% since the end of September (through 11/27) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.