Were Hedge Funds Right About Souring On Toyota Motor Corporation (TM)?

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 Toyota Motor Corporation (NYSE:TM) and determine whether hedge funds had an edge regarding this stock.

Is Toyota Motor Corporation (NYSE:TM) a buy, sell, or hold? The best stock pickers were getting less optimistic. The number of bullish hedge fund bets dropped by 1 lately. Our calculations also showed that TM 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.

To most stock holders, hedge funds are seen as worthless, outdated investment tools of the past. While there are more than 8000 funds in operation today, Our experts choose to focus on the aristocrats of this group, about 850 funds. It is estimated that this group of investors administer the lion’s share of the smart money’s total capital, and by observing their inimitable stock picks, Insider Monkey has formulated numerous investment strategies that have historically outperformed Mr. Market. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Phill Gross of Adage Capital Management

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. Keeping this in mind let’s view the key hedge fund action regarding Toyota Motor Corporation (NYSE:TM).

What does smart money think about Toyota Motor Corporation (NYSE:TM)?

Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in TM over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Is TM A Good Stock To Buy?

More specifically, Renaissance Technologies was the largest shareholder of Toyota Motor Corporation (NYSE:TM), with a stake worth $139.5 million reported as of the end of September. Trailing Renaissance Technologies was Adage Capital Management, which amassed a stake valued at $48.5 million. Orbis Investment Management, Citadel Investment Group, and PEAK6 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 Adage Capital Management allocated the biggest weight to Toyota Motor Corporation (NYSE:TM), around 0.14% of its 13F portfolio. Orbis Investment Management is also relatively very bullish on the stock, dishing out 0.14 percent of its 13F equity portfolio to TM.

Because Toyota Motor Corporation (NYSE:TM) has faced a decline in interest from the smart money, logic holds that there was a specific group of money managers that decided to sell off their entire stakes in the first quarter. At the top of the heap, Ken Griffin’s Citadel Investment Group sold off the largest stake of all the hedgies followed by Insider Monkey, totaling about $4.7 million in stock. Israel Englander’s fund, Millennium Management, also dumped its stock, about $1.4 million worth. These transactions are interesting, as total hedge fund interest fell by 1 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Toyota Motor Corporation (NYSE:TM) but similarly valued. These stocks are PepsiCo, Inc. (NYSE:PEP), Cisco Systems, Inc. (NASDAQ:CSCO), Netflix, Inc. (NASDAQ:NFLX), and NVIDIA Corporation (NASDAQ:NVDA). All of these stocks’ market caps are similar to TM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PEP 57 2820020 -2
CSCO 58 2531778 -10
NFLX 109 13648064 -5
NVDA 95 4127764 16
Average 79.75 5781907 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 79.75 hedge funds with bullish positions and the average amount invested in these stocks was $5782 million. That figure was $206 million in TM’s case. Netflix, Inc. (NASDAQ:NFLX) is the most popular stock in this table. On the other hand PepsiCo, Inc. (NYSE:PEP) is the least popular one with only 57 bullish hedge fund positions. Compared to these stocks Toyota Motor Corporation (NYSE:TM) is even less popular than PEP. Hedge funds dodged a bullet by taking a bearish stance towards TM. Our calculations showed that the top 10 most popular hedge fund stocks 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 managed to beat the market by 15.5 percentage points. Unfortunately TM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); TM investors were disappointed as the stock returned 4.7% 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 so far in 2020.

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