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Were Hedge Funds Right About Souring On Aon plc (AON)?

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 Aon plc (NYSE:AON) and determine whether hedge funds skillfully traded this stock.

Aon plc (NYSE:AON) was in 47 hedge funds’ portfolios at the end of March. AON has seen a decrease in enthusiasm from smart money recently. There were 51 hedge funds in our database with AON positions at the end of the previous quarter. Our calculations also showed that AON 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was 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’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.

Clint Carlson of Carlson 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 Aon plc (NYSE:AON).

How are hedge funds trading Aon plc (NYSE:AON)?

At the end of the first quarter, a total of 47 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AON over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AON A Good Stock To Buy?

The largest stake in Aon plc (NYSE:AON) was held by Eagle Capital Management, which reported holding $971.3 million worth of stock at the end of September. It was followed by Viking Global with a $378 million position. Other investors bullish on the company included Cantillon Capital Management, BlueSpruce Investments, and Iridian Asset Management. In terms of the portfolio weights assigned to each position BloombergSen allocated the biggest weight to Aon plc (NYSE:AON), around 9.48% of its 13F portfolio. Night Owl Capital Management is also relatively very bullish on the stock, designating 6.22 percent of its 13F equity portfolio to AON.

Because Aon plc (NYSE:AON) has experienced falling interest from the smart money, logic holds that there exists a select few hedge funds that decided to sell off their full holdings in the first quarter. Intriguingly, Boykin Curry’s Eagle Capital Management dumped the biggest position of all the hedgies monitored by Insider Monkey, totaling an estimated $837.9 million in stock. Brian Ashford-Russell and Tim Woolley’s fund, Polar Capital, also dumped its stock, about $69.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 4 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Aon plc (NYSE:AON) but similarly valued. We will take a look at Dollar General Corp. (NYSE:DG), Ferrari N.V. (NYSE:RACE), Norfolk Southern Corp. (NYSE:NSC), and BCE Inc. (NYSE:BCE). This group of stocks’ market valuations are similar to AON’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DG 60 2102704 10
RACE 29 1729509 -7
NSC 51 1172825 -1
BCE 13 204550 -6
Average 38.25 1302397 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.25 hedge funds with bullish positions and the average amount invested in these stocks was $1302 million. That figure was $2705 million in AON’s case. Dollar General Corp. (NYSE:DG) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 13 bullish hedge fund positions. Aon plc (NYSE:AON) 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 AON wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AON were disappointed as the stock returned 17% 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.