Were Hedge Funds Right About Dumping Morgan Stanley (MS)?

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 (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 take a look at whether Morgan Stanley (NYSE:MS) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is Morgan Stanley (NYSE:MS) ready to rally soon? The smart money is taking a bearish view. The number of long hedge fund bets decreased by 8 lately. Our calculations also showed that MS 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).

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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.


Jeffrey Ubben of ValueAct Capital

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). 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. With all of this in mind let’s take a glance at the recent hedge fund action encompassing Morgan Stanley (NYSE:MS).

How are hedge funds trading Morgan Stanley (NYSE:MS)?

At the end of the fourth quarter, a total of 60 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the previous quarter. By comparison, 57 hedge funds held shares or bullish call options in MS a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Among these funds, Eagle Capital Management held the most valuable stake in Morgan Stanley (NYSE:MS), which was worth $783.9 million at the end of the third quarter. On the second spot was ValueAct Capital which amassed $766.8 million worth of shares. Pzena Investment Management, Diamond Hill Capital, and GLG 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 Tegean Capital Management allocated the biggest weight to Morgan Stanley (NYSE:MS), around 11.38% of its 13F portfolio. Springhouse Capital Management is also relatively very bullish on the stock, designating 8.94 percent of its 13F equity portfolio to MS.

Due to the fact that Morgan Stanley (NYSE:MS) has faced falling interest from hedge fund managers, it’s safe to say that there was a specific group of fund managers who were dropping their entire stakes heading into Q4. Intriguingly, Renaissance Technologies cut the biggest investment of all the hedgies tracked by Insider Monkey, comprising close to $105.4 million in stock, and Edgar Wachenheim’s Greenhaven Associates was right behind this move, as the fund dumped about $11.7 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 8 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to Morgan Stanley (NYSE:MS). We will take a look at Gilead Sciences, Inc. (NASDAQ:GILD), Caterpillar Inc. (NYSE:CAT), Goldman Sachs Group, Inc. (NYSE:GS), and Enbridge Inc (NYSE:ENB). This group of stocks’ market valuations are similar to MS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GILD 67 3722904 1
CAT 52 3227642 13
GS 75 7581397 -3
ENB 21 285809 1
Average 53.75 3704438 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 53.75 hedge funds with bullish positions and the average amount invested in these stocks was $3704 million. That figure was $3846 million in MS’s case. Goldman Sachs Group, Inc. (NYSE:GS) is the most popular stock in this table. On the other hand Enbridge Inc (NYSE:ENB) is the least popular one with only 21 bullish hedge fund positions. Morgan Stanley (NYSE:MS) is not the most popular stock in this group but hedge fund interest is still above average. 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 lost 1.0% in 2020 through April 20th but beat the market by 11 percentage points. Unfortunately MS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MS were disappointed as the stock returned -24.5% 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.
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.