Were Hedge Funds Right About Piling Into TransDigm Group Incorporated (TDG)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards TransDigm Group Incorporated (NYSE:TDG) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is TransDigm Group Incorporated (NYSE:TDG) worth your attention right now? The smart money was in a pessimistic mood. The number of long hedge fund bets went down by 5 lately. Our calculations also showed that TDG 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). TDG was in 58 hedge funds’ portfolios at the end of March. There were 63 hedge funds in our database with TDG positions at the end of the previous quarter.

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

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Armitage Egerton Capital

John Armitage of Egerton 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 we’re going to view the fresh hedge fund action surrounding TransDigm Group Incorporated (NYSE:TDG).

How are hedge funds trading TransDigm Group Incorporated (NYSE:TDG)?

At the end of the first quarter, a total of 58 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards TDG over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Is TDG A Good Stock To Buy?

Among these funds, Windacre Partnership held the most valuable stake in TransDigm Group Incorporated (NYSE:TDG), which was worth $723.9 million at the end of the third quarter. On the second spot was Tiger Global Management LLC which amassed $562.7 million worth of shares. Stockbridge Partners, AltaRock Partners, and Matrix Capital Management 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 Windacre Partnership allocated the biggest weight to TransDigm Group Incorporated (NYSE:TDG), around 32.3% of its 13F portfolio. AltaRock Partners is also relatively very bullish on the stock, setting aside 20.54 percent of its 13F equity portfolio to TDG.

Because TransDigm Group Incorporated (NYSE:TDG) has experienced a decline in interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of hedge funds who were dropping their entire stakes by the end of the first quarter. Intriguingly, John Armitage’s Egerton Capital Limited sold off the largest position of the 750 funds tracked by Insider Monkey, comprising about $396.5 million in stock, and James Crichton’s Hitchwood Capital Management was right behind this move, as the fund sold off about $50.4 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 5 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks similar to TransDigm Group Incorporated (NYSE:TDG). We will take a look at Williams Companies, Inc. (NYSE:WMB), Realty Income Corporation (NYSE:O), New Oriental Education & Technology Group Inc. (NYSE:EDU), and Coca-Cola European Partners plc (NYSE:CCEP). This group of stocks’ market caps match TDG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WMB 47 552828 7
O 25 225190 -1
EDU 42 1555475 -8
CCEP 22 185913 1
Average 34 629852 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $630 million. That figure was $3801 million in TDG’s case. Williams Companies, Inc. (NYSE:WMB) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks TransDigm Group Incorporated (NYSE:TDG) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on TDG as the stock returned 38.1% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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