Were Hedge Funds Right About Souring On Deere & Company (DE)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Deere & Company (NYSE:DE) and determine whether hedge funds had an edge regarding this stock.

Is Deere & Company (NYSE:DE) going to take off soon? The best stock pickers were in a bearish mood. The number of long hedge fund bets dropped by 6 lately. Our calculations also showed that DE 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). DE was in 44 hedge funds’ portfolios at the end of March. There were 50 hedge funds in our database with DE holdings at the end of the previous quarter.

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

To most shareholders, hedge funds are assumed to be underperforming, outdated financial vehicles of years past. While there are more than 8000 funds in operation at the moment, Our researchers hone in on the moguls of this club, around 850 funds. These money managers handle bulk of the hedge fund industry’s total capital, and by tracking their finest equity investments, Insider Monkey has revealed various investment strategies that have historically surpassed Mr. Market. Insider Monkey’s flagship short hedge fund strategy exceeded the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

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 take a look at the fresh hedge fund action surrounding Deere & Company (NYSE:DE).

How have hedgies been trading Deere & Company (NYSE:DE)?

Heading into the second quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the previous quarter. By comparison, 31 hedge funds held shares or bullish call options in DE a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in Deere & Company (NYSE:DE) was held by Greenhaven Associates, which reported holding $139.8 million worth of stock at the end of September. It was followed by Markel Gayner Asset Management with a $139 million position. Other investors bullish on the company included Adage Capital Management, Suvretta Capital Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Caxton Associates LP allocated the biggest weight to Deere & Company (NYSE:DE), around 5.84% of its 13F portfolio. Firefly Value Partners is also relatively very bullish on the stock, earmarking 5.41 percent of its 13F equity portfolio to DE.

Since Deere & Company (NYSE:DE) has witnessed falling interest from hedge fund managers, logic holds that there exists a select few money managers who were dropping their positions entirely in the first quarter. Interestingly, David Blood and Al Gore’s Generation Investment Management said goodbye to the largest investment of all the hedgies tracked by Insider Monkey, totaling an estimated $103.9 million in stock, and Brandon Haley’s Holocene Advisors was right behind this move, as the fund cut about $53.4 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 6 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Deere & Company (NYSE:DE) but similarly valued. We will take a look at Global Payments Inc (NYSE:GPN), The Charles Schwab Corporation (NYSE:SCHW), The Progressive Corporation (NYSE:PGR), and Vale SA (NYSE:VALE). This group of stocks’ market valuations are closest to DE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GPN 67 2154936 3
SCHW 62 2907493 -8
PGR 51 1505680 3
VALE 28 1111939 2
Average 52 1920012 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 52 hedge funds with bullish positions and the average amount invested in these stocks was $1920 million. That figure was $875 million in DE’s case. Global Payments Inc (NYSE:GPN) is the most popular stock in this table. On the other hand Vale SA (NYSE:VALE) is the least popular one with only 28 bullish hedge fund positions. Deere & Company (NYSE:DE) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 and surpassed the market by 15.5 percentage points. Unfortunately DE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); DE investors were disappointed as the stock returned 14.3% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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