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Should I Buy TransDigm Group Incorporated (TDG)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards TransDigm Group Incorporated (NYSE:TDG) and determine whether hedge funds skillfully traded this stock.

Is TransDigm Group Incorporated (NYSE:TDG) a safe stock to buy now? Investors who are in the know were getting more optimistic. The number of bullish hedge fund bets moved up by 4 lately. TransDigm Group Incorporated (NYSE:TDG) was in 62 hedge funds’ portfolios at the end of June. The all time high for this statistics is 63. Our calculations also showed that TDG 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). There were 58 hedge funds in our database with TDG positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Sahm Adrangi Kerrisdale Capital

Sahm Adrangi of Kerrisdale Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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.. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s go over the recent hedge fund action surrounding TransDigm Group Incorporated (NYSE:TDG).

How have hedgies been trading TransDigm Group Incorporated (NYSE:TDG)?

At Q2’s end, a total of 62 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TDG over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Windacre Partnership was the largest shareholder of TransDigm Group Incorporated (NYSE:TDG), with a stake worth $777.8 million reported as of the end of September. Trailing Windacre Partnership was Tiger Global Management LLC, which amassed a stake valued at $776.8 million. Lone Pine Capital, Stockbridge Partners, and AltaRock Partners 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 AltaRock Partners allocated the biggest weight to TransDigm Group Incorporated (NYSE:TDG), around 27.02% of its 13F portfolio. Windacre Partnership is also relatively very bullish on the stock, setting aside 23.36 percent of its 13F equity portfolio to TDG.

As industrywide interest jumped, specific money managers were breaking ground themselves. Yiheng Capital, managed by Jonathan Guo, established the largest position in TransDigm Group Incorporated (NYSE:TDG). Yiheng Capital had $109.8 million invested in the company at the end of the quarter. Jonathan Auerbach’s Hound Partners also initiated a $69.4 million position during the quarter. The following funds were also among the new TDG investors: Sahm Adrangi’s Kerrisdale Capital, David Thomas’s Atalan Capital, and Steve Cohen’s Point72 Asset Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as TransDigm Group Incorporated (NYSE:TDG) but similarly valued. These stocks are McCormick & Company, Incorporated (NYSE:MKC), Verisign, Inc. (NASDAQ:VRSN), Moderna, Inc. (NASDAQ:MRNA), Motorola Solutions Inc (NYSE:MSI), V.F. Corporation (NYSE:VFC), Parker-Hannifin Corporation (NYSE:PH), and Twitter Inc (NYSE:TWTR). All of these stocks’ market caps are similar to TDG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MKC 32 251773 1
VRSN 47 6245654 6
MRNA 37 788433 12
MSI 36 535822 2
VFC 27 558958 8
PH 39 1172205 7
TWTR 68 1278023 13
Average 40.9 1547267 7

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.9 hedge funds with bullish positions and the average amount invested in these stocks was $1547 million. That figure was $6066 million in TDG’s case. Twitter Inc (NYSE:TWTR) is the most popular stock in this table. On the other hand V.F. Corporation (NYSE:VFC) is the least popular one with only 27 bullish hedge fund positions. TransDigm Group Incorporated (NYSE:TDG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TDG is 81.2. 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. 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 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 28.2% in 2020 through August 24th but beat the market by 20.6 percentage points. Unfortunately TDG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TDG were disappointed as the stock returned 10.5% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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