Should I Buy Jefferies Financial Group Inc. (JEF)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Jefferies Financial Group Inc. (NYSE:JEF) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Jefferies Financial Group Inc. (NYSE:JEF) was in 37 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 39. JEF shareholders have witnessed an increase in hedge fund sentiment in recent months. There were 30 hedge funds in our database with JEF holdings at the end of March. Our calculations also showed that JEF isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

At the moment there are numerous gauges market participants put to use to grade stocks. Two of the most useful gauges are hedge fund and insider trading indicators. Our researchers have shown that, historically, those who follow the best picks of the top investment managers can outclass the broader indices by a significant margin (see the details here).

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. Keeping this in mind we’re going to check out the new hedge fund action surrounding Jefferies Financial Group Inc. (NYSE:JEF).

How are hedge funds trading Jefferies Financial Group Inc. (NYSE:JEF)?

At the end of the second quarter, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 23% from the previous quarter. The graph below displays the number of hedge funds with bullish position in JEF over the last 20 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.

The largest stake in Jefferies Financial Group Inc. (NYSE:JEF) was held by First Pacific Advisors LLC, which reported holding $280.8 million worth of stock at the end of September. It was followed by Mason Capital Management with a $88 million position. Other investors bullish on the company included Arrowstreet Capital, Moerus Capital Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position Moerus Capital Management allocated the biggest weight to Jefferies Financial Group Inc. (NYSE:JEF), around 16.72% of its 13F portfolio. Mason Capital Management is also relatively very bullish on the stock, earmarking 8.47 percent of its 13F equity portfolio to JEF.

As aggregate interest increased, some big names have jumped into Jefferies Financial Group Inc. (NYSE:JEF) headfirst. Mason Capital Management, managed by Kenneth Mario Garschina, established the most valuable position in Jefferies Financial Group Inc. (NYSE:JEF). Mason Capital Management had $88 million invested in the company at the end of the quarter. Cliff Asness’s AQR Capital Management also initiated a $15.6 million position during the quarter. The following funds were also among the new JEF investors: Dmitry Balyasny’s Balyasny Asset Management, Ken Griffin’s Citadel Investment Group, and Israel Englander’s Millennium Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Jefferies Financial Group Inc. (NYSE:JEF) but similarly valued. These stocks are Ashland Global Holdings Inc.. (NYSE:ASH), TerraForm Power Inc (NASDAQ:TERP), Exponent, Inc. (NASDAQ:EXPO), Pilgrim’s Pride Corporation (NASDAQ:PPC), Allison Transmission Holdings Inc (NYSE:ALSN), L Brands Inc (NYSE:LB), and AGCO Corporation (NYSE:AGCO). This group of stocks’ market caps resemble JEF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ASH 32 976347 0
TERP 21 235830 4
EXPO 19 92487 2
PPC 15 59157 -3
ALSN 32 542648 5
LB 42 1472803 3
AGCO 21 144524 2
Average 26 503399 1.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $503 million. That figure was $586 million in JEF’s case. L Brands Inc (NYSE:LB) is the most popular stock in this table. On the other hand Pilgrim’s Pride Corporation (NASDAQ:PPC) is the least popular one with only 15 bullish hedge fund positions. Jefferies Financial Group Inc. (NYSE:JEF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for JEF is 79.2. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on JEF, though not to the same extent, as the stock returned 13.8% since the end of June and outperformed the market as well.

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