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Were Hedge Funds Right About Souring On Raytheon Company (RTN)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. At Insider Monkey, we pore over the filings of nearly 835 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of December 31. In this article, we will use that wealth of knowledge to determine whether or not Raytheon Company (NYSE:RTN) makes for a good investment right now.

Raytheon Company (NYSE:RTN) has experienced a decrease in enthusiasm from smart money of late. RTN was in 53 hedge funds’ portfolios at the end of December. There were 54 hedge funds in our database with RTN holdings at the end of the previous quarter. Our calculations also showed that RTN isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
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 financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

John Armitage Egerton Capital

John Armitage of Egerton Capital

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a gander at the latest hedge fund action surrounding Raytheon Company (NYSE:RTN).

How are hedge funds trading Raytheon Company (NYSE:RTN)?

At Q4’s end, a total of 53 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from the previous quarter. By comparison, 38 hedge funds held shares or bullish call options in RTN a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

Among these funds, Soroban Capital Partners held the most valuable stake in Raytheon Company (NYSE:RTN), which was worth $1001.1 million at the end of the third quarter. On the second spot was OZ Management which amassed $294.6 million worth of shares. Two Sigma Advisors, Viking Global, and Palestra Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Soroban Capital Partners allocated the biggest weight to Raytheon Company (NYSE:RTN), around 13.13% of its 13F portfolio. Fir Tree is also relatively very bullish on the stock, earmarking 6.28 percent of its 13F equity portfolio to RTN.

Due to the fact that Raytheon Company (NYSE:RTN) has experienced declining sentiment from the smart money, logic holds that there lies a certain “tier” of hedgies who sold off their entire stakes heading into Q4. Interestingly, Dmitry Balyasny’s Balyasny Asset Management dropped the largest position of all the hedgies monitored by Insider Monkey, totaling close to $83 million in stock, and Louis Bacon’s Moore Global Investments was right behind this move, as the fund cut about $26.5 million worth. These transactions are interesting, as total hedge fund interest dropped by 1 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Raytheon Company (NYSE:RTN). These stocks are The Charles Schwab Corporation (NYSE:SCHW), Brookfield Asset Management Inc. (NYSE:BAM), Micron Technology, Inc. (NASDAQ:MU), and Westpac Banking Corporation (NYSE:WBK). This group of stocks’ market caps are similar to RTN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SCHW 70 4021282 11
BAM 34 1282206 2
MU 89 4565616 17
WBK 7 49339 3
Average 50 2479611 8.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 50 hedge funds with bullish positions and the average amount invested in these stocks was $2480 million. That figure was $3459 million in RTN’s case. Micron Technology, Inc. (NASDAQ:MU) is the most popular stock in this table. On the other hand Westpac Banking Corporation (NYSE:WBK) is the least popular one with only 7 bullish hedge fund positions. Raytheon Company (NYSE:RTN) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately RTN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on RTN were disappointed as the stock returned -28.4% 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 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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