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

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 (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Is Toyota Motor Corporation (NYSE:TM) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Hedge fund interest in Toyota Motor Corporation (NYSE:TM) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare TM to other stocks including PepsiCo, Inc. (NASDAQ:PEP), The Boeing Company (NYSE:BA), and Citigroup Inc. (NYSE:C) to get a better sense of its popularity.

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 41 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.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind let’s take a peek at the key hedge fund action regarding Toyota Motor Corporation (NYSE:TM).

What have hedge funds been doing with Toyota Motor Corporation (NYSE:TM)?

At Q4’s end, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards TM over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in Toyota Motor Corporation (NYSE:TM), which was worth $153.2 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $70.9 million worth of shares. Orbis Investment Management, Centiva Capital, and Citadel Investment Group 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 Centiva Capital allocated the biggest weight to Toyota Motor Corporation (NYSE:TM), around 0.27% of its 13F portfolio. Adage Capital Management is also relatively very bullish on the stock, setting aside 0.17 percent of its 13F equity portfolio to TM.

Since Toyota Motor Corporation (NYSE:TM) has witnessed declining sentiment from hedge fund managers, it’s easy to see that there was a specific group of fund managers who sold off their full holdings heading into Q4. Intriguingly, Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital dumped the largest investment of the 750 funds monitored by Insider Monkey, valued at close to $2.1 million in call options, and D. E. Shaw’s D E Shaw was right behind this move, as the fund dropped about $0.5 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over 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. (NASDAQ:PEP), The Boeing Company (NYSE:BA), Citigroup Inc. (NYSE:C), and China Mobile Limited (NYSE:CHL). This group of stocks’ market valuations are similar to TM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PEP 59 3107057 -4
BA 82 2856387 -1
C 98 11733711 -3
CHL 12 386065 0
Average 62.75 4520805 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 62.75 hedge funds with bullish positions and the average amount invested in these stocks was $4521 million. That figure was $249 million in TM’s case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand China Mobile Limited (NYSE:CHL) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Toyota Motor Corporation (NYSE:TM) is even less popular than CHL. 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 1.0% in 2020 through May 1st but managed to beat the market by 12.9 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 -13.8% 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 most of these stocks already outperformed the market so far in 2020.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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