Were Hedge Funds Right Betting On These Finance Stocks in Q4?

Finance represents one of the best-performing sectors over the long-run, even though it is marked by periods of high volatility. Some of the largest companies in the sector are popular among hedge funds and other institutional investors, because of their strong fundamentals and management’s focus on returns to shareholders. With the interest rates having been increased, financial companies are expected to further increase their profits. Moreover, the large amounts of assets and diversification into many businesses allow these companies to carry some intrinsic value that can be unlocked through spin-offs or divestiture. In this article we are going to take a look at the five finance stocks that ranked as the most popular among the funds we track in the last round of 13F filings.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).

#5 Goldman Sachs Group Inc (NYSE:GS)

-Hedge Funds with Long Positions (as of September 30): 63

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $5.57 billion

Let’s start with the investment banking giant Goldman Sachs Group Inc (NYSE:GS), which saw its ownership among funds covered by us declined by four during the third quarter. Though shares of the company managed to rebound during the fourth quarter and gained 4.87%, it wasn’t enough to recoup the 16.5% decline they suffered during the previous quarter. Currently the stock is trading at 8.92 times its forward price to earnings ratio, significantly lower than where most of its investment banking peers are trading.

For the fourth quarter of 2015, Goldman Sachs Group Inc (NYSE:GS) posted a net income of $1.27 per share, significantly below the $4.38 reported a year earlier and lower than the $3.53 per share expected by analysts. However, the revenue of $7.27 billion, even though was down from $7.69 billion posed a year earlier, managed to beat the estimates of $7.07 billion. The drop in profits was mainly due to the $5 billion settlement with the Justice Department and most analysts maintained bullish ratings on the stock, following the report of the results.