At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards JPMorgan Chase & Co. (NYSE:JPM) at the end of the first quarter and determine whether the smart money was really smart about this stock.
JPMorgan Chase & Co. (NYSE:JPM) investors should pay attention to an increase in hedge fund sentiment lately. The number of bullish hedge funds towards JPM reached its all time high during the second quarter. Our calculations also showed that JPM ranked #12 among the 30 most popular stocks among hedge funds (click for Q2 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.
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 58 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.
Daniel Sundheim D1 Capital
Daniel Sundheim of D1 Capital Partners
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out ideas like this under-the-radar stock to identify the next tenbagger. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we're going to take a look at the fresh hedge fund action regarding JPMorgan Chase & Co. (NYSE:JPM).
Hedge fund activity in JPMorgan Chase & Co. (NYSE:JPM)
Heading into the third quarter of 2020, a total of 123 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in JPM over the last 20 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Berkshire Hathaway held the most valuable stake in JPMorgan Chase & Co. (NYSE:JPM), which was worth $2088.9 million at the end of the third quarter. On the second spot was Viking Global which amassed $603.1 million worth of shares. Fisher Asset Management, D1 Capital Partners, and D E Shaw 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 Brave Warrior Capital allocated the biggest weight to JPMorgan Chase & Co. (NYSE:JPM), around 9.31% of its 13F portfolio. Hi-Line Capital Management is also relatively very bullish on the stock, dishing out 7.02 percent of its 13F equity portfolio to JPM.
Now, some big names were breaking ground themselves. D1 Capital Partners, managed by Daniel Sundheim, assembled the biggest position in JPMorgan Chase & Co. (NYSE:JPM). D1 Capital Partners had $580.4 million invested in the company at the end of the quarter. Stanley Druckenmiller's Duquesne Capital also made a $151.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Clint Carlson's Carlson Capital, Paul Marshall and Ian Wace's Marshall Wace LLP, and Keith Meister's Corvex Capital.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as JPMorgan Chase & Co. (NYSE:JPM) but similarly valued. We will take a look at The Procter & Gamble Company (NYSE:PG), Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), Mastercard Incorporated (NYSE:MA), UnitedHealth Group Inc. (NYSE:UNH), Intel Corporation (NASDAQ:INTC), Verizon Communications Inc. (NYSE:VZ), and AT&T Inc. (NYSE:T). This group of stocks' market valuations are closest to JPM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PG,73,9244143,-4 TSM,58,5209772,4 MA,147,14350337,8 UNH,96,8326373,-8 INTC,78,6480425,5 VZ,68,2973925,0 T,57,1659928,0 Average,82.4,6892129,0.7 [/table]
As you can see these stocks had an average of 82.4 hedge funds with bullish positions and the average amount invested in these stocks was $6.9 billion. That figure was $8.7 billion in JPM's case. Mastercard Incorporated (NYSE:MA) is the most popular stock in this table. On the other hand AT&T Inc. (NYSE:T) is the least popular one with only 57 bullish hedge fund positions. JPMorgan Chase & Co. (NYSE:JPM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for JPM is 85.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 gained 28.2% in 2020 through August 24th but beat the market by 20.6 percentage points. Unfortunately JPM wasn't nearly as popular as these 10 stocks and hedge funds that were betting on JPM were disappointed as the stock returned 7.4% 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.
