Were Hedge Funds Right About FGL Holdings (FG) ?

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 FGL Holdings (NYSE:FG) 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.

Is FGL Holdings (NYSE:FG) a buy right now? Prominent investors are getting less optimistic. The number of bullish hedge fund bets were trimmed by 8 in recent months. Our calculations also showed that FG 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.

Christian Leone of Luxor Capital Group

Keeping this in mind we’re going to take a look at the recent hedge fund action encompassing FGL Holdings (NYSE:FG).

Hedge fund activity in FGL Holdings (NYSE:FG)

At Q4’s end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -32% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in FG over the last 18 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in FGL Holdings (NYSE:FG) was held by Kingstown Capital Management, which reported holding $58.6 million worth of stock at the end of September. It was followed by StackLine Partners with a $22.5 million position. Other investors bullish on the company included Luxor Capital Group, Ulysses Management, and Driehaus Capital. In terms of the portfolio weights assigned to each position Marcato Capital Management allocated the biggest weight to FGL Holdings (NYSE:FG), around 100% of its 13F portfolio. Kingstown Capital Management is also relatively very bullish on the stock, dishing out 17.01 percent of its 13F equity portfolio to FG.

Judging by the fact that FGL Holdings (NYSE:FG) has witnessed declining sentiment from hedge fund managers, it’s easy to see that there lies a certain “tier” of money managers that decided to sell off their positions entirely by the end of the third quarter. At the top of the heap, Farhad Nanji and Michael DeMichele’s MFN Partners sold off the biggest stake of the “upper crust” of funds followed by Insider Monkey, valued at close to $23.1 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also dumped its stock, about $4.1 million worth. These moves are interesting, as aggregate hedge fund interest fell by 8 funds by the end of the third quarter.

Let’s also examine hedge fund activity in other stocks similar to FGL Holdings (NYSE:FG). These stocks are MakeMyTrip Limited (NASDAQ:MMYT), Glaukos Corporation (NYSE:GKOS), Bottomline Technologies (NASDAQ:EPAY), and JELD-WEN Holding, Inc. (NYSE:JELD). This group of stocks’ market values resemble FG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MMYT 14 71965 4
GKOS 16 133423 4
EPAY 17 132162 -5
JELD 29 333396 15
Average 19 167737 4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $168 million. That figure was $162 million in FG’s case. JELD-WEN Holding, Inc. (NYSE:JELD) is the most popular stock in this table. On the other hand MakeMyTrip Limited (NASDAQ:MMYT) is the least popular one with only 14 bullish hedge fund positions. FGL Holdings (NYSE:FG) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but still beat the market by 4.2 percentage points. A small number of hedge funds were also right about betting on FG as the stock returned -8.2% during the same time period and outperformed the market by an even larger margin.
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.