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 Travelers Companies Inc (NYSE:TRV) and determine whether hedge funds had an edge regarding this stock.
Is Travelers Companies Inc (NYSE:TRV) the right pick for your portfolio? Investors who are in the know were getting less optimistic. The number of long hedge fund bets decreased by 10 lately. Our calculations also showed that TRV 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
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 we're going to take a gander at the key hedge fund action encompassing Travelers Companies Inc (NYSE:TRV).
Hedge fund activity in Travelers Companies Inc (NYSE:TRV)
At Q1's end, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -26% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TRV over the last 18 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Among these funds, AQR Capital Management held the most valuable stake in Travelers Companies Inc (NYSE:TRV), which was worth $228.4 million at the end of the third quarter. On the second spot was Polar Capital which amassed $67.1 million worth of shares. Two Sigma Advisors, Markel Gayner Asset Management, and Balyasny Asset 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 Meru Capital allocated the biggest weight to Travelers Companies Inc (NYSE:TRV), around 3.16% of its 13F portfolio. Polar Capital is also relatively very bullish on the stock, earmarking 0.72 percent of its 13F equity portfolio to TRV.
Because Travelers Companies Inc (NYSE:TRV) has witnessed falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of money managers who were dropping their entire stakes last quarter. At the top of the heap, Warren Buffett's Berkshire Hathaway dumped the largest stake of the "upper crust" of funds followed by Insider Monkey, comprising an estimated $42.8 million in stock. Anand Parekh's fund, Alyeska Investment Group, also dropped its stock, about $33.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 10 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Travelers Companies Inc (NYSE:TRV) but similarly valued. We will take a look at DuPont de Nemours Inc (NYSE:DD), Hormel Foods Corporation (NYSE:HRL), HP Inc. (NYSE:HPQ), and Alcon Inc. (NYSE:ALC). This group of stocks' market caps are similar to TRV's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DD,54,2411525,-14 HRL,28,276267,5 HPQ,43,2180945,-6 ALC,25,605394,1 Average,37.5,1368533,-3.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 37.5 hedge funds with bullish positions and the average amount invested in these stocks was $1369 million. That figure was $482 million in TRV's case. DuPont de Nemours Inc (NYSE:DD) is the most popular stock in this table. On the other hand Alcon Inc. (NYSE:ALC) is the least popular one with only 25 bullish hedge fund positions. Travelers Companies Inc (NYSE:TRV) 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. 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 gained 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately TRV wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); TRV investors were disappointed as the stock returned 15.6% 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 in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.