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Were Hedge Funds Right About Souring On Markel Corporation (MKL)?

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 Markel Corporation (NYSE:MKL) and determine whether hedge funds skillfully traded this stock.

Is Markel Corporation (NYSE:MKL) a bargain? Prominent investors were in a bearish mood. The number of bullish hedge fund positions dropped by 5 lately. Our calculations also showed that MKL 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). MKL was in 32 hedge funds’ portfolios at the end of the first quarter of 2020. There were 37 hedge funds in our database with MKL positions at the end of the previous quarter.

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

In today’s marketplace there are dozens of methods shareholders use to value their holdings. Some of the less known methods are hedge fund and insider trading sentiment. Our researchers have shown that, historically, those who follow the best picks of the top hedge fund managers can outpace the market by a significant amount (see the details here).

BRIDGEWATER ASSOCIATES

Ray Dalio of Bridgewater Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 let’s take a look at the recent hedge fund action encompassing Markel Corporation (NYSE:MKL).

How are hedge funds trading Markel Corporation (NYSE:MKL)?

At Q1’s end, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the fourth quarter of 2019. On the other hand, there were a total of 23 hedge funds with a bullish position in MKL a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

The largest stake in Markel Corporation (NYSE:MKL) was held by Akre Capital Management, which reported holding $461.5 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $195.4 million position. Other investors bullish on the company included Polar Capital, Wallace R. Weitz & Co., and Giverny Capital. In terms of the portfolio weights assigned to each position Capital Returns Management allocated the biggest weight to Markel Corporation (NYSE:MKL), around 5.01% of its 13F portfolio. Giverny Capital is also relatively very bullish on the stock, dishing out 4.87 percent of its 13F equity portfolio to MKL.

Seeing as Markel Corporation (NYSE:MKL) has faced declining sentiment from the smart money, we can see that there lies a certain “tier” of hedge funds that slashed their positions entirely heading into Q4. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dumped the biggest stake of all the hedgies tracked by Insider Monkey, totaling an estimated $77.5 million in stock, and Robert Joseph Caruso’s Select Equity Group was right behind this move, as the fund cut about $62.2 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 5 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Markel Corporation (NYSE:MKL) but similarly valued. These stocks are Seagate Technology plc (NASDAQ:STX), Galapagos NV (NASDAQ:GLPG), The J.M. Smucker Company (NYSE:SJM), and Domino’s Pizza, Inc. (NYSE:DPZ). This group of stocks’ market caps resemble MKL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
STX 32 2205943 -3
GLPG 15 151547 1
SJM 36 479070 5
DPZ 45 1759501 14
Average 32 1149015 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $1149 million. That figure was $982 million in MKL’s case. Domino’s Pizza, Inc. (NYSE:DPZ) is the most popular stock in this table. On the other hand Galapagos NV (NASDAQ:GLPG) is the least popular one with only 15 bullish hedge fund positions. Markel Corporation (NYSE:MKL) 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 MKL wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MKL investors were disappointed as the stock returned -0.5% 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.