Were Hedge Funds Right About Selling Bank of America Corporation (BAC)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Bank of America Corporation (NYSE:BAC) and determine whether the smart money was really smart about this stock.

Is Bank of America Corporation (NYSE:BAC) ready to rally soon? Hedge funds are getting less bullish. The number of bullish hedge fund bets retreated by 4 recently. Our calculations also showed that BAC ranked 23rd 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). BAC was in 95 hedge funds’ portfolios at the end of March. There were 99 hedge funds in our database with BAC holdings at the end of the previous quarter. BAC is hedge funds’ second favorite banking stock.

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

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 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 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.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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. Keeping this in mind we’re going to take a look at the latest hedge fund action encompassing Bank of America Corporation (NYSE:BAC).

How are hedge funds trading Bank of America Corporation (NYSE:BAC)?

At the end of the first quarter, a total of 95 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the previous quarter. By comparison, 96 hedge funds held shares or bullish call options in BAC a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in Bank of America Corporation (NYSE:BAC) was held by Berkshire Hathaway, which reported holding $19637.9 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $376 million position. Other investors bullish on the company included Pzena Investment Management, Steadfast Capital Management, and First Pacific Advisors LLC. In terms of the portfolio weights assigned to each position Berkshire Hathaway allocated the biggest weight to Bank of America Corporation (NYSE:BAC), around 11.19% of its 13F portfolio. Aquamarine Capital Management is also relatively very bullish on the stock, earmarking 11.12 percent of its 13F equity portfolio to BAC.

Judging by the fact that Bank of America Corporation (NYSE:BAC) has witnessed bearish sentiment from the smart money, it’s safe to say that there was a specific group of hedge funds who were dropping their full holdings in the first quarter. It’s worth mentioning that Rajiv Jain’s GQG Partners said goodbye to the biggest position of all the hedgies followed by Insider Monkey, totaling about $509.2 million in stock. Patrick Degorce’s fund, Theleme Partners, also dropped its stock, about $418.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 4 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Bank of America Corporation (NYSE:BAC) but similarly valued. These stocks are Pfizer Inc. (NYSE:PFE), The Walt Disney Company (NYSE:DIS), Toyota Motor Corporation (NYSE:TM), and PepsiCo, Inc. (NASDAQ:PEP). This group of stocks’ market caps resemble BAC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PFE 67 3159878 5
DIS 102 4701800 -16
TM 11 206410 -1
PEP 57 2820020 -2
Average 59.25 2722027 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 59.25 hedge funds with bullish positions and the average amount invested in these stocks was $2722 million. That figure was $21722 million in BAC’s case. The Walt Disney Company (NYSE:DIS) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 11 bullish hedge fund positions. Bank of America Corporation (NYSE:BAC) 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately BAC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on BAC were disappointed as the stock returned 17.3% 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.