Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.
General Electric Company (NYSE: GE ) has experienced an increase in activity from the world's largest hedge funds of late. GE was in 46 hedge funds' portfolios at the end of the third quarter of 2018. There were 44 hedge funds in our database with GE positions at the end of the previous quarter. Our calculations also showed that GE isn't among the 30 most popular stocks among hedge funds .
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to the 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 market by 18 percentage points since May 2014 through December 3, 2018 ( 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Nelson Peltz's Trian Partners has been targeting GE since 2015. Here is how they summarized their involvement:
"In October 2015, Trian announced its investment in GE. In October 2017, Trian’s Chief Investment Officer and a Founding Partner, Ed Garden, was elected to the GE board of directors.
In June 2018, GE announced the results of a strategic review, in which GE will focus on Aviation, Power and Renewable Energy, creating a simpler, stronger, leading high-tech Industrial company. In addition to the pending combination of its Transportation business with Wabtec, GE plans to separate GE Healthcare into a standalone company, pursue an orderly separation from BHGE (Baker Hughes, a GE company) over the next two to three years, make its corporate structure leaner, substantially reduce debt and improve liquidity. The actions unlock both a pure-play healthcare company and a tier-one oil and gas servicing and equipment manufacturer. Trian supports these strategic initiatives and believes that these initiatives will create substantial value for shareholders."
Please note that our strategies don't rely on a single hedge fund's views to make recommendations. Trian Partners has been wrong about GE and fortunately other hedge funds sent differing signals. GE wasn't a popular hedge fund stock compared to its market cap peers. Let's take a gander at the key hedge fund action in recent months encompassing General Electric Company (NYSE: GE ).
What have hedge funds been doing with General Electric Company (NYSE:GE)?
Heading into the fourth quarter of 2018, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the previous quarter. By comparison, 68 hedge funds held shares or bullish call options in GE heading into this year. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Viking Global held the most valuable stake in General Electric Company (NYSE:GE), which was worth $1495.1 million at the end of the third quarter. On the second spot was Trian Partners which amassed $800.1 million worth of shares. Moreover, Southeastern Asset Management, Pzena Investment Management, and DE Shaw were also bullish on General Electric Company (NYSE:GE), allocating a large percentage of their portfolios to this stock.
As industrywide interest jumped, key money managers have been driving this bullishness. Canyon Capital Advisors , managed by Joshua Friedman and Mitchell Julis, initiated the biggest position in General Electric Company (NYSE:GE). Canyon Capital Advisors had $200.5 million invested in the company at the end of the quarter. Jeffrey Tannenbaum's Fir Tree also made a $44.8 million investment in the stock during the quarter. The other funds with brand new GE positions are Ray Dalio's Bridgewater Associates , and Sander Gerber's Hudson Bay Capital Management .
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as General Electric Company (NYSE:GE) but similarly valued. These stocks are Booking Holdings Inc. (NASDAQ: BKNG ), Equinor ASA (NYSE: EQNR ), Lowe's Companies, Inc. (NYSE: LOW ), and American Express Company (NYSE: AXP ). This group of stocks' market valuations are closest to GE's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BKNG,68,6498246,-2 EQNR,12,433196,3 LOW,57,4725018,1 AXP,50,18852093,3 Average,46.75,7627,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 46.75 hedge funds with bullish positions and the average amount invested in these stocks was $7627 million. That figure was $4540 million in GE's case. Booking Holdings Inc. (NASDAQ: BKNG ) is the most popular stock in this table. On the other hand, Equinor ASA (NYSE: EQNR ) is the least popular one with only 12 bullish hedge fund positions. General Electric Company (NYSE:GE) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. In this regard, BKNG might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.