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Were Hedge Funds Right About Souring On L3Harris Technologies, Inc. (LHX)?

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 L3Harris Technologies, Inc. (NYSE:LHX) and determine whether hedge funds skillfully traded this stock.

L3Harris Technologies, Inc. (NYSE:LHX) was in 43 hedge funds’ portfolios at the end of March. LHX shareholders have witnessed a decrease in hedge fund interest recently. There were 48 hedge funds in our database with LHX positions at the end of the previous quarter. Our calculations also showed that LHX 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.

Eric Mandelblatt Soroban Capital Partners

Eric Mandelblatt of Soroban Capital Partners

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 take a look at the latest hedge fund action surrounding L3Harris Technologies, Inc. (NYSE:LHX).

How have hedgies been trading L3Harris Technologies, Inc. (NYSE:LHX)?

At Q1’s end, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in LHX a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the largest position in L3Harris Technologies, Inc. (NYSE:LHX). Citadel Investment Group has a $354.6 million position in the stock, comprising 0.2% of its 13F portfolio. Sitting at the No. 2 spot is Soroban Capital Partners, managed by Eric W. Mandelblatt and Gaurav Kapadia, which holds a $232.8 million position; 4.3% of its 13F portfolio is allocated to the stock. Other peers with similar optimism contain Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management, David Cohen and Harold Levy’s Iridian Asset Management and Brandon Haley’s Holocene Advisors. In terms of the portfolio weights assigned to each position SAYA Management allocated the biggest weight to L3Harris Technologies, Inc. (NYSE:LHX), around 16.2% of its 13F portfolio. Palestra Capital Management is also relatively very bullish on the stock, dishing out 7.22 percent of its 13F equity portfolio to LHX.

Because L3Harris Technologies, Inc. (NYSE:LHX) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of fund managers that slashed their entire stakes by the end of the first quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dumped the largest stake of the 750 funds tracked by Insider Monkey, valued at an estimated $101.2 million in stock, and Renaissance Technologies was right behind this move, as the fund dumped about $65.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks similar to L3Harris Technologies, Inc. (NYSE:LHX). We will take a look at Banco Santander, S.A. (NYSE:SAN), Honda Motor Co Ltd (NYSE:HMC), America Movil SAB de CV (NYSE:AMX), and Banco Santander (Brasil) SA (NYSE:BSBR). This group of stocks’ market values match LHX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SAN 18 348505 -3
HMC 8 144471 -1
AMX 11 128726 -6
BSBR 8 16250 0
Average 11.25 159488 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $159 million. That figure was $1594 million in LHX’s case. Banco Santander, S.A. (NYSE:SAN) is the most popular stock in this table. On the other hand Honda Motor Co Ltd (NYSE:HMC) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks L3Harris Technologies, Inc. (NYSE:LHX) is more popular among hedge funds. 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 still beat the market by 15.5 percentage points. Unfortunately LHX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LHX were disappointed as the stock returned -5.4% 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.