Were Hedge Funds Right About Selling TD Ameritrade Holding Corp. (AMTD)?

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 TD Ameritrade Holding Corp. (NASDAQ:AMTD) at the end of the first quarter and determine whether the smart money was really smart about this stock.

TD Ameritrade Holding Corp. (NASDAQ:AMTD) was in 46 hedge funds’ portfolios at the end of the first quarter of 2020. AMTD investors should be aware of a decrease in hedge fund interest of late. There were 50 hedge funds in our database with AMTD holdings at the end of the previous quarter. Our calculations also showed that AMTD 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).

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.

Matthew Halbower Pentwater Capital

Matthew Halbower of Pentwater 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. Keeping this in mind let’s view the fresh hedge fund action surrounding TD Ameritrade Holding Corp. (NASDAQ:AMTD).

How are hedge funds trading TD Ameritrade Holding Corp. (NASDAQ:AMTD)?

At the end of the first quarter, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AMTD over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

The largest stake in TD Ameritrade Holding Corp. (NASDAQ:AMTD) was held by Pentwater Capital Management, which reported holding $206.5 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $199.9 million position. Other investors bullish on the company included Magnetar Capital, Water Island Capital, and Alpine Associates. In terms of the portfolio weights assigned to each position Jet Capital Investors allocated the biggest weight to TD Ameritrade Holding Corp. (NASDAQ:AMTD), around 7.71% of its 13F portfolio. Water Island Capital is also relatively very bullish on the stock, setting aside 6.57 percent of its 13F equity portfolio to AMTD.

Due to the fact that TD Ameritrade Holding Corp. (NASDAQ:AMTD) has experienced a decline in interest from hedge fund managers, it’s easy to see that there were a few hedge funds who were dropping their entire stakes last quarter. Intriguingly, Dan Loeb’s Third Point sold off the biggest position of the “upper crust” of funds watched by Insider Monkey, comprising close to $149.1 million in stock. Adam Guren’s fund, Hunting Hill Global Capital, also cut its stock, about $27 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 4 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as TD Ameritrade Holding Corp. (NASDAQ:AMTD) but similarly valued. We will take a look at Entergy Corporation (NYSE:ETR), McCormick & Company, Incorporated (NYSE:MKC), Schlumberger Limited. (NYSE:SLB), and Match Group, Inc. (NASDAQ:MTCH). This group of stocks’ market valuations resemble AMTD’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ETR 34 1036847 3
MKC 31 280968 7
SLB 49 641144 2
MTCH 38 1032869 6
Average 38 747957 4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 38 hedge funds with bullish positions and the average amount invested in these stocks was $748 million. That figure was $1250 million in AMTD’s case. Schlumberger Limited. (NYSE:SLB) is the most popular stock in this table. On the other hand McCormick & Company, Incorporated (NYSE:MKC) is the least popular one with only 31 bullish hedge fund positions. TD Ameritrade Holding Corp. (NASDAQ:AMTD) 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 AMTD wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AMTD were disappointed as the stock returned 5.8% 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.