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Were Hedge Funds Right About Dumping Harley-Davidson, Inc. (HOG)?

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 (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s analyze whether Harley-Davidson, Inc. (NYSE:HOG) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Harley-Davidson, Inc. (NYSE:HOG) has experienced a decrease in hedge fund interest of late. HOG was in 19 hedge funds’ portfolios at the end of December. There were 21 hedge funds in our database with HOG positions at the end of the previous quarter. Our calculations also showed that HOG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

David Harding

David Harding of Winton Capital Management

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a gander at the recent hedge fund action regarding Harley-Davidson, Inc. (NYSE:HOG).

What does smart money think about Harley-Davidson, Inc. (NYSE:HOG)?

At the end of the fourth quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from one quarter earlier. By comparison, 19 hedge funds held shares or bullish call options in HOG a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Harley-Davidson, Inc. (NYSE:HOG) was held by Impala Asset Management, which reported holding $70 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $7.7 million position. Other investors bullish on the company included Winton Capital Management, Citadel Investment Group, and GLG Partners. In terms of the portfolio weights assigned to each position Impala Asset Management allocated the biggest weight to Harley-Davidson, Inc. (NYSE:HOG), around 5.31% of its 13F portfolio. TwinBeech Capital is also relatively very bullish on the stock, setting aside 0.18 percent of its 13F equity portfolio to HOG.

Because Harley-Davidson, Inc. (NYSE:HOG) has experienced falling interest from the entirety of the hedge funds we track, it’s safe to say that there exists a select few funds who were dropping their entire stakes heading into Q4. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management sold off the biggest investment of the 750 funds watched by Insider Monkey, worth about $12.6 million in stock, and Matthew Hulsizer’s PEAK6 Capital Management was right behind this move, as the fund cut about $1.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 2 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Harley-Davidson, Inc. (NYSE:HOG) but similarly valued. These stocks are OneMain Holdings Inc (NYSE:OMF), Penumbra Inc (NYSE:PEN), WPX Energy Inc (NYSE:WPX), and Manpowergroup Inc (NYSE:MAN). This group of stocks’ market values are closest to HOG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OMF 39 529947 10
PEN 30 308085 5
WPX 44 746371 -3
MAN 27 476316 7
Average 35 515180 4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 35 hedge funds with bullish positions and the average amount invested in these stocks was $515 million. That figure was $105 million in HOG’s case. WPX Energy Inc (NYSE:WPX) is the most popular stock in this table. On the other hand Manpowergroup Inc (NYSE:MAN) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Harley-Davidson, Inc. (NYSE:HOG) is even less popular than MAN. Hedge funds dodged a bullet by taking a bearish stance towards HOG. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but managed to beat the market by 5.5 percentage points. Unfortunately HOG wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); HOG investors were disappointed as the stock returned -44% 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 most of these stocks already outperformed the market so far in Q1.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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