Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Prudential Financial Inc (NYSE:PRU).
Prudential Financial Inc (NYSE:PRU) was in 36 hedge funds’ portfolios at the end of the fourth quarter of 2019. PRU investors should be aware of an increase in activity from the world’s largest hedge funds of late. There were 30 hedge funds in our database with PRU holdings at the end of the previous quarter. Our calculations also showed that PRU 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.
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’ 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 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.
Phill Gross of Adage Capital Management
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, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind we’re going to take a look at the new hedge fund action surrounding Prudential Financial Inc (NYSE:PRU).
How have hedgies been trading Prudential Financial Inc (NYSE:PRU)?
At the end of the fourth quarter, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the third quarter of 2019. By comparison, 31 hedge funds held shares or bullish call options in PRU a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital has the number one position in Prudential Financial Inc (NYSE:PRU), worth close to $355.4 million, corresponding to 0.8% of its total 13F portfolio. The second largest stake is held by John Overdeck and David Siegel of Two Sigma Advisors, with a $84.3 million position; 0.2% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism contain Cliff Asness’s AQR Capital Management, Phill Gross and Robert Atchinson’s Adage Capital Management and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Pittencrieff Partners – Gabalex Capital allocated the biggest weight to Prudential Financial Inc (NYSE:PRU), around 4.3% of its 13F portfolio. Redwood Capital Management is also relatively very bullish on the stock, earmarking 2.57 percent of its 13F equity portfolio to PRU.
As aggregate interest increased, some big names have been driving this bullishness. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the most valuable position in Prudential Financial Inc (NYSE:PRU). Balyasny Asset Management had $6.2 million invested in the company at the end of the quarter. Ali Motamed’s Invenomic Capital Management also made a $4.5 million investment in the stock during the quarter. The other funds with brand new PRU positions are Matthew L Pinz’s Pinz Capital, Jinghua Yan’s TwinBeech Capital, and Alec Litowitz and Ross Laser’s Magnetar Capital.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Prudential Financial Inc (NYSE:PRU) but similarly valued. These stocks are Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), Public Storage (NYSE:PSA), Canadian Imperial Bank of Commerce (NYSE:CM), and Ford Motor Company (NYSE:F). This group of stocks’ market valuations resemble PRU’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BBVA | 8 | 338963 | -2 |
| PSA | 27 | 927343 | 2 |
| CM | 14 | 240820 | -3 |
| F | 36 | 1104113 | -4 |
| Average | 21.25 | 652810 | -1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $653 million. That figure was $692 million in PRU’s case. Ford Motor Company (NYSE:F) is the most popular stock in this table. On the other hand Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA) is the least popular one with only 8 bullish hedge fund positions. Prudential Financial Inc (NYSE:PRU) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately PRU wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PRU were disappointed as the stock returned -37.4% during the same time period 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
