Were Hedge Funds Right About TransDigm Group Incorporated (TDG)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind let’s see whether TransDigm Group Incorporated (NYSE:TDG) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Is TransDigm Group Incorporated (NYSE:TDG) a worthy investment now? The smart money is becoming hopeful. The number of long hedge fund bets moved up by 3 in recent months. Our calculations also showed that TDG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). TDG was in 63 hedge funds’ portfolios at the end of December. There were 60 hedge funds in our database with TDG holdings at the end of the previous quarter.

If you’d ask most stock holders, hedge funds are assumed to be worthless, old financial vehicles of yesteryear. While there are over 8000 funds in operation today, We choose to focus on the moguls of this club, about 850 funds. These money managers handle bulk of the smart money’s total capital, and by tailing their first-class picks, Insider Monkey has revealed various investment strategies that have historically exceeded the broader indices. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

John Armitage Egerton Capital

John Armitage of Egerton Capital

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. Blockchain technology is about to go mainstream and reach heavy adoption, so we check out this tech investor’s blockchain stock pick. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). 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. Keeping this in mind we’re going to view the new hedge fund action surrounding TransDigm Group Incorporated (NYSE:TDG).

What have hedge funds been doing with TransDigm Group Incorporated (NYSE:TDG)?

At Q4’s end, a total of 63 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from the third quarter of 2019. By comparison, 47 hedge funds held shares or bullish call options in TDG a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Tiger Global Management LLC held the most valuable stake in TransDigm Group Incorporated (NYSE:TDG), which was worth $1157 million at the end of the third quarter. On the second spot was Lone Pine Capital which amassed $702.5 million worth of shares. Stockbridge Partners, Egerton Capital Limited, and Matrix 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 Stockbridge Partners allocated the biggest weight to TransDigm Group Incorporated (NYSE:TDG), around 23.42% of its 13F portfolio. Cat Rock Capital is also relatively very bullish on the stock, dishing out 20.83 percent of its 13F equity portfolio to TDG.

With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, created the most valuable position in TransDigm Group Incorporated (NYSE:TDG). Point72 Asset Management had $23.1 million invested in the company at the end of the quarter. David Thomas’s Atalan Capital also initiated a $22.4 million position during the quarter. The following funds were also among the new TDG investors: Christopher Weldon’s Stamina Capital Management, Michael Cowley’s Sandbar Asset Management, and William Heard’s Heard Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as TransDigm Group Incorporated (NYSE:TDG) but similarly valued. We will take a look at IQVIA Holdings, Inc. (NYSE:IQV), Public Service Enterprise Group Incorporated (NYSE:PEG), HP Inc. (NYSE:HPQ), and eBay Inc (NASDAQ:EBAY). This group of stocks’ market valuations resemble TDG’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IQV 64 3822679 -4
PEG 31 987064 11
HPQ 49 2547120 8
EBAY 51 3621065 -8
Average 48.75 2744482 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.75 hedge funds with bullish positions and the average amount invested in these stocks was $2744 million. That figure was $5539 million in TDG’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand Public Service Enterprise Group Incorporated (NYSE:PEG) is the least popular one with only 31 bullish hedge fund positions. TransDigm Group Incorporated (NYSE:TDG) 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 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 lost 1.0% in 2020 through April 20th but beat the market by 11 percentage points. Unfortunately TDG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TDG were disappointed as the stock returned -43.5% 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 many of these stocks already outperformed the market so far this year.
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.