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Were Hedge Funds Right About Souring On General Electric Company (GE)?

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 General Electric Company (NYSE:GE) and determine whether hedge funds had an edge regarding this stock.

General Electric Company (NYSE:GE) has experienced a decrease in activity from the world’s largest hedge funds recently. Our calculations also showed that GE 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 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 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.

Scott Bessent of Key Square Capital 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. Now we’re going to take a glance at the latest hedge fund action surrounding General Electric Company (NYSE:GE).

How are hedge funds trading General Electric Company (NYSE:GE)?

At the end of the first quarter, a total of 58 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards GE over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is GE A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Eagle Capital Management, managed by Boykin Curry, holds the biggest position in General Electric Company (NYSE:GE). Eagle Capital Management has a $958.7 million position in the stock, comprising 4% of its 13F portfolio. The second most bullish fund manager is Pzena Investment Management, managed by Richard S. Pzena, which holds a $512.7 million position; 3.9% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that are bullish encompass Nelson Peltz’s Trian Partners, Renaissance Technologies and Mason Hawkins’s Southeastern Asset Management. In terms of the portfolio weights assigned to each position Trian Partners allocated the biggest weight to General Electric Company (NYSE:GE), around 7.35% of its 13F portfolio. Southeastern Asset Management is also relatively very bullish on the stock, earmarking 6.45 percent of its 13F equity portfolio to GE.

Due to the fact that General Electric Company (NYSE:GE) has experienced a decline in interest from the smart money, it’s easy to see that there is a sect of fund managers that decided to sell off their full holdings in the first quarter. Intriguingly, James Crichton’s Hitchwood Capital Management cut the largest stake of the “upper crust” of funds watched by Insider Monkey, totaling an estimated $46.9 million in stock, and Doug Silverman and Alexander Klabin’s Senator Investment Group was right behind this move, as the fund said goodbye to about $44.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 2 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as General Electric Company (NYSE:GE) but similarly valued. These stocks are American Express Company (NYSE:AXP), BlackRock, Inc. (NYSE:BLK), Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF), and Cigna Corporation (NYSE:CI). This group of stocks’ market valuations are closest to GE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AXP 57 15414059 -1
BLK 38 678087 -5
KOF 7 325265 -3
CI 74 2988126 2
Average 44 4851384 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 44 hedge funds with bullish positions and the average amount invested in these stocks was $4851 million. That figure was $3532 million in GE’s case. Cigna Corporation (NYSE:CI) is the most popular stock in this table. On the other hand Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) is the least popular one with only 7 bullish hedge fund positions. General Electric Company (NYSE:GE) 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 GE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on GE were disappointed as the stock returned -13.9% 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.