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

Asma UL Husna

Thu, Mar 28, 2019, 6:35 PM

The market has been volatile in the fourth quarter as the Federal Reserve continued its rate hikes to normalize the interest rates. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, and the funds' movements is one of the reasons why the major indexes have retraced. In this article, we analyze what the smart money thinks of TransDigm Group Incorporated (NYSE:TDG) and find out how it is affected by hedge funds' moves.

Is TransDigm Group Incorporated (NYSE:TDG) a buy here? Investors who are in the know are still in a bullish mood even though the number of long hedge fund positions decreased by 1 in recent months. Our calculations also showed that TDG isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Let's take a look at the key hedge fund action surrounding TransDigm Group Incorporated (NYSE:TDG).

How are hedge funds trading TransDigm Group Incorporated (NYSE:TDG)?

At Q4's end, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from one quarter earlier. On the other hand, there were a total of 37 hedge funds with a bullish position in TDG a year ago. With hedgies' capital changing hands, there exists an "upper tier" of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Among these funds, Tiger Global Management LLC held the most valuable stake in TransDigm Group Incorporated (NYSE:TDG), which was worth $702.6 million at the end of the third quarter. On the second spot was Stockbridge Partners which amassed $613.1 million worth of shares. Moreover, Windacre Partnership, Lone Pine Capital, and SPO Advisory Corp were also bullish on TransDigm Group Incorporated (NYSE:TDG), allocating a large percentage of their portfolios to this stock.

Due to the fact that TransDigm Group Incorporated (NYSE:TDG) has witnessed falling interest from hedge fund managers, it's easy to see that there were a few hedge funds who were dropping their entire stakes last quarter. It's worth mentioning that Zach Schreiber's Point State Capital dumped the biggest position of the 700 funds followed by Insider Monkey, valued at an estimated $38.3 million in stock. Scott Phillips's fund, Latimer Light Capital, also said goodbye to its stock, about $17.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 1 funds last quarter.

Let's check out hedge fund activity in other stocks similar to TransDigm Group Incorporated (NYSE:TDG). We will take a look at Verisign, Inc. (NASDAQ:VRSN), Palo Alto Networks Inc (NYSE:PANW), Cintas Corporation (NASDAQ:CTAS), and Credicorp Ltd. (NYSE:BAP). This group of stocks' market valuations resemble TDG's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VRSN,30,4391236,1 PANW,46,2204328,0 CTAS,29,691809,-2 BAP,14,784467,-1 Average,29.75,2017960,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $2018 million. That figure was $4062 million in TDG's case. Palo Alto Networks Inc (NYSE:PANW) is the most popular stock in this table. On the other hand Credicorp Ltd. (NYSE:BAP) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks TransDigm Group Incorporated (NYSE:TDG) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on TDG as the stock returned 29.4% and outperformed the market as well.

Disclosure: None. This article was originally published at Insider Monkey.

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