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Were Hedge Funds Right About Northrop Grumman Corporation (NOC)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Northrop Grumman Corporation (NYSE:NOC) and determine whether hedge funds skillfully traded this stock.

Is Northrop Grumman Corporation (NYSE:NOC) the right investment to pursue these days? Prominent investors were in a bullish mood. The number of bullish hedge fund bets moved up by 1 recently. Our calculations also showed that NOC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). NOC was in 45 hedge funds’ portfolios at the end of March. There were 44 hedge funds in our database with NOC positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Zack Schreiber PointState Capital

Zach Schreiber of Point State Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a gander at the new hedge fund action encompassing Northrop Grumman Corporation (NYSE:NOC).

How have hedgies been trading Northrop Grumman Corporation (NYSE:NOC)?

At Q1’s end, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 2% from the previous quarter. By comparison, 35 hedge funds held shares or bullish call options in NOC 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.

According to Insider Monkey’s hedge fund database, Soroban Capital Partners, managed by Eric W. Mandelblatt and Gaurav Kapadia, holds the biggest position in Northrop Grumman Corporation (NYSE:NOC). Soroban Capital Partners has a $460.6 million position in the stock, comprising 8.4% of its 13F portfolio. The second most bullish fund manager is AQR Capital Management, led by Cliff Asness, holding a $184.2 million position; 0.3% of its 13F portfolio is allocated to the company. Other peers with similar optimism consist of Panayotis Takis Sparaggis’s Alkeon Capital Management, and Steve Cohen’s Point72 Asset Management. In terms of the portfolio weights assigned to each position Soroban Capital Partners allocated the biggest weight to Northrop Grumman Corporation (NYSE:NOC), around 8.44% of its 13F portfolio. Jade Capital Advisors is also relatively very bullish on the stock, designating 5.72 percent of its 13F equity portfolio to NOC.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Soroban Capital Partners, managed by Eric W. Mandelblatt and Gaurav Kapadia, established the largest position in Northrop Grumman Corporation (NYSE:NOC). Soroban Capital Partners had $460.6 million invested in the company at the end of the quarter. Ken Heebner’s Capital Growth Management also initiated a $13.6 million position during the quarter. The other funds with brand new NOC positions are Louis Bacon’s Moore Global Investments, Zach Schreiber’s Point State Capital, and Robert Vincent McHugh’s Jade Capital Advisors.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Northrop Grumman Corporation (NYSE:NOC) but similarly valued. These stocks are VMware, Inc. (NYSE:VMW), Chubb Limited (NYSE:CB), The Bank of Nova Scotia (NYSE:BNS), and Uber Technologies, Inc. (NYSE:UBER). All of these stocks’ market caps are closest to NOC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VMW 27 420625 -6
CB 33 691382 9
BNS 12 240173 -4
UBER 97 5084706 3
Average 42.25 1609222 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.25 hedge funds with bullish positions and the average amount invested in these stocks was $1609 million. That figure was $984 million in NOC’s case. Uber Technologies, Inc. (NYSE:UBER) is the most popular stock in this table. On the other hand The Bank of Nova Scotia (NYSE:BNS) is the least popular one with only 12 bullish hedge fund positions. Northrop Grumman Corporation (NYSE:NOC) 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 gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately NOC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on NOC were disappointed as the stock returned 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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