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Were Hedge Funds Right About Dumping Lloyds Banking Group PLC (LYG)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended December 31, so let’s proceed with the discussion of the hedge fund sentiment on Lloyds Banking Group PLC (NYSE:LYG).

Is Lloyds Banking Group PLC (NYSE:LYG) a bargain? The smart money is taking a bearish view. The number of bullish hedge fund positions fell by 3 recently. Our calculations also showed that LYG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

According to most market participants, hedge funds are viewed as underperforming, outdated investment vehicles of the past. While there are over 8000 funds trading today, Our experts look at the upper echelon of this club, approximately 850 funds. Most estimates calculate that this group of people watch over the lion’s share of all hedge funds’ total capital, and by tailing their unrivaled stock picks, Insider Monkey has unearthed numerous investment strategies that have historically surpassed the market. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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 we’re going to check out the new hedge fund action surrounding Lloyds Banking Group PLC (NYSE:LYG).

How are hedge funds trading Lloyds Banking Group PLC (NYSE:LYG)?

At Q4’s end, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -38% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LYG over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Renaissance Technologies, founded by Jim Simons, holds the largest position in Lloyds Banking Group PLC (NYSE:LYG). Renaissance Technologies has a $62.8 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is Citadel Investment Group, led by Ken Griffin, holding a $2.5 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining members of the smart money that are bullish include John Overdeck and David Siegel’s Two Sigma Advisors, and Donald Sussman’s Paloma Partners. In terms of the portfolio weights assigned to each position Renaissance Technologies allocated the biggest weight to Lloyds Banking Group PLC (NYSE:LYG), around 0.05% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, earmarking 0.0026 percent of its 13F equity portfolio to LYG.

Due to the fact that Lloyds Banking Group PLC (NYSE:LYG) has faced a decline in interest from hedge fund managers, we can see that there lies a certain “tier” of fund managers who sold off their entire stakes in the third quarter. It’s worth mentioning that Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners sold off the largest position of the “upper crust” of funds monitored by Insider Monkey, worth close to $3 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund dropped about $0.5 million worth. These moves are interesting, as total hedge fund interest dropped by 3 funds in the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Lloyds Banking Group PLC (NYSE:LYG) but similarly valued. These stocks are Illinois Tool Works Inc. (NYSE:ITW), Prologis Inc (NYSE:PLD), Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), and CSX Corporation (NASDAQ:CSX). This group of stocks’ market caps resemble LYG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ITW 32 470691 -1
PLD 35 456205 4
VRTX 53 3271636 3
CSX 46 2345719 5
Average 41.5 1636063 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.5 hedge funds with bullish positions and the average amount invested in these stocks was $1636 million. That figure was $67 million in LYG’s case. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is the most popular stock in this table. On the other hand Illinois Tool Works Inc. (NYSE:ITW) is the least popular one with only 32 bullish hedge fund positions. Compared to these stocks Lloyds Banking Group PLC (NYSE:LYG) is even less popular than ITW. Hedge funds dodged a bullet by taking a bearish stance towards LYG. 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 11.7% in 2020 through March 11th but managed to beat the market by 3.1 percentage points. Unfortunately LYG wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); LYG investors were disappointed as the stock returned -37.2% 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.

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

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