Was The Smart Money Right About Piling Into TransDigm Group (TDG)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the fourth quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of TransDigm Group Incorporated (NYSE:TDG) based on that data.

Hedge fund interest in TransDigm Group Incorporated (NYSE:TDG) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that TDG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings). At the end of this article we will also compare TDG to other stocks including Cummins Inc. (NYSE:CMI), Paychex, Inc. (NASDAQ:PAYX), and STMicroelectronics N.V. (NYSE:STM) to get a better sense of its popularity.

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. Hedge funds have more than $3.5 trillion in assets under management, so you can’t expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds’ moves today.

Chase Coleman of Tiger Global

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let’s take a look at the new hedge fund action surrounding TransDigm Group Incorporated (NYSE:TDG).

Do Hedge Funds Think TDG Is A Good Stock To Buy Now?

At fourth quarter’s end, a total of 64 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 63 hedge funds held shares or bullish call options in TDG a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is TDG A Good Stock To Buy?

The largest stake in TransDigm Group Incorporated (NYSE:TDG) was held by Tiger Global Management LLC, which reported holding $1087.5 million worth of stock at the end of December. It was followed by Stockbridge Partners with a $962 million position. Other investors bullish on the company included Matrix Capital Management, AltaRock Partners, and Windacre Partnership. In terms of the portfolio weights assigned to each position AltaRock Partners allocated the biggest weight to TransDigm Group Incorporated (NYSE:TDG), around 26.6% of its 13F portfolio. Stockbridge Partners is also relatively very bullish on the stock, dishing out 22.64 percent of its 13F equity portfolio to TDG.

Because TransDigm Group Incorporated (NYSE:TDG) has experienced falling interest from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of hedgies that elected to cut their positions entirely by the end of the fourth quarter. Interestingly, Lone Pine Capital said goodbye to the biggest position of the 750 funds tracked by Insider Monkey, valued at close to $358.4 million in stock, and Ross Turner’s Pelham Capital was right behind this move, as the fund said goodbye to about $38 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

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 Cummins Inc. (NYSE:CMI), Paychex, Inc. (NASDAQ:PAYX), STMicroelectronics N.V. (NYSE:STM), CRH PLC (NYSE:CRH), The Allstate Corporation (NYSE:ALL), V.F. Corporation (NYSE:VFC), and Okta, Inc. (NASDAQ:OKTA). This group of stocks’ market valuations resemble TDG’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CMI 45 828914 -4
PAYX 32 910613 4
STM 17 142352 -4
CRH 7 100951 0
ALL 38 838274 0
VFC 31 760265 9
OKTA 61 2308732 10
Average 33 841443 2.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $841 million. That figure was $6891 million in TDG’s case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand CRH PLC (NYSE:CRH) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks TransDigm Group Incorporated (NYSE:TDG) is more popular among hedge funds. Our overall hedge fund sentiment score for TDG is 85. 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 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and still beat the market by 1.6 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 -0.8% since the end of the fourth quarter (through 4/30) 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 most of these stocks already outperformed the market since 2019.

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