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Were Hedge Funds Right About Souring On General Dynamics Corporation (GD)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards General Dynamics Corporation (NYSE:GD).

General Dynamics Corporation (NYSE:GD) has experienced a decrease in support from the world’s most elite money managers of late. GD was in 40 hedge funds’ portfolios at the end of June. There were 42 hedge funds in our database with GD positions at the end of the previous quarter. Our calculations also showed that GD isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

In the eyes of most shareholders, hedge funds are seen as underperforming, old investment vehicles of years past. While there are more than 8000 funds in operation at the moment, We hone in on the crème de la crème of this group, around 750 funds. These investment experts administer bulk of the hedge fund industry’s total capital, and by monitoring their inimitable stock picks, Insider Monkey has unearthed a few investment strategies that have historically surpassed the S&P 500 index. Insider Monkey’s flagship hedge fund strategy exceeded the S&P 500 index by around 5 percentage points per year since its inception in May 2014. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 25.7% since February 2017 (through September 30th) even though the market was up more than 33% during the same period. We just shared a list of 10 short targets in our latest quarterly update .

Phill Gross, Adage Capital Management

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to check out the recent hedge fund action encompassing General Dynamics Corporation (NYSE:GD).

How have hedgies been trading General Dynamics Corporation (NYSE:GD)?

At the end of the second quarter, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. On the other hand, there were a total of 41 hedge funds with a bullish position in GD a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

GD_oct2019

The largest stake in General Dynamics Corporation (NYSE:GD) was held by Longview Asset Management, which reported holding $5981.6 million worth of stock at the end of March. It was followed by Farallon Capital with a $242.8 million position. Other investors bullish on the company included Adage Capital Management, Alyeska Investment Group, and Impala Asset Management.

Seeing as General Dynamics Corporation (NYSE:GD) has witnessed declining sentiment from hedge fund managers, it’s safe to say that there were a few money managers that elected to cut their entire stakes last quarter. It’s worth mentioning that Benjamin A. Smith’s Laurion Capital Management said goodbye to the biggest stake of all the hedgies followed by Insider Monkey, worth close to $29.8 million in stock. Bain Capital’s fund, Brookside Capital, also dropped its stock, about $17.7 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 2 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as General Dynamics Corporation (NYSE:GD) but similarly valued. These stocks are Deere & Company (NYSE:DE), Marsh & McLennan Companies, Inc. (NYSE:MMC), Prologis Inc (NYSE:PLD), and Lloyds Banking Group PLC (NYSE:LYG). This group of stocks’ market valuations are similar to GD’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DE 40 1582854 9
MMC 29 741920 0
PLD 24 457047 -1
LYG 8 52501 0
Average 25.25 708581 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $709 million. That figure was $7212 million in GD’s case. Deere & Company (NYSE:DE) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 8 bullish hedge fund positions. General Dynamics Corporation (NYSE:GD) 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately GD wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on GD were disappointed as the stock returned 1.1% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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