Were Hedge Funds Right About Avoiding AT&T Inc. (T)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about AT&T Inc. (NYSE:T).

AT&T Inc. (NYSE:T) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 57 hedge funds’ portfolios at the end of the second quarter of 2020. Our calculations also showed that T 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). At the end of this article we will also compare T to other stocks including Adobe Inc. (NASDAQ:ADBE), Bank of America Corporation (NYSE:BAC), and Paypal Holdings Inc (NASDAQ:PYPL) to get a better sense of its popularity.

Video: 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 58 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. 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 to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a look at the fresh hedge fund action surrounding AT&T Inc. (NYSE:T).

What have hedge funds been doing with AT&T Inc. (NYSE:T)?

At second quarter’s end, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2020. By comparison, 42 hedge funds held shares or bullish call options in T a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Ken Griffin’s Citadel Investment Group has the biggest call position in AT&T Inc. (NYSE:T), worth close to $282.7 million, amounting to 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is Appaloosa Management LP, managed by David Tepper, which holds a $274.4 million position; the fund has 4.8% of its 13F portfolio invested in the stock. Some other peers that are bullish consist of Phill Gross and Robert Atchinson’s Adage Capital Management, Israel Englander’s Millennium Management and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Mountain Road Advisors allocated the biggest weight to AT&T Inc. (NYSE:T), around 6.23% of its 13F portfolio. Appaloosa Management LP is also relatively very bullish on the stock, setting aside 4.77 percent of its 13F equity portfolio to T.

Seeing as AT&T Inc. (NYSE:T) has faced bearish sentiment from the smart money, it’s safe to say that there is a sect of hedge funds that decided to sell off their positions entirely in the second quarter. It’s worth mentioning that Martin Taylor’s Crake Asset Management dumped the largest investment of the 750 funds followed by Insider Monkey, totaling close to $22.9 million in stock. John Brandmeyer and Jonathan C. Angrist’s fund, Cognios Capital, also said goodbye to its stock, about $2.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks similar to AT&T Inc. (NYSE:T). We will take a look at Adobe Inc. (NASDAQ:ADBE), Bank of America Corporation (NYSE:BAC), Paypal Holdings Inc (NASDAQ:PYPL), The Walt Disney Company (NYSE:DIS), Tesla Inc. (NASDAQ:TSLA), Netflix, Inc. (NASDAQ:NFLX), and Novartis AG (NYSE:NVS). All of these stocks’ market caps match T’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 91.6 hedge funds with bullish positions and the average amount invested in these stocks was $10461 million. That figure was $1660 million in T’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 21 bullish hedge fund positions. AT&T Inc. (NYSE:T) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for T is 37.8. 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 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 29.2% in 2020 through October 16th and surpassed the market by 19.7 percentage points. Unfortunately T wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); T investors were disappointed as the stock returned -6.3% since the end of June (through 10/16) 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 in 2020.

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