In this article you are going to find out whether hedge funds think Diageo plc (NYSE:DEO) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Is DEO a good stock to buy now? Hedge funds were selling. The number of bullish hedge fund positions shrunk by 1 recently. Diageo plc (NYSE:DEO) was in 19 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 25. Our calculations also showed that DEO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 20 hedge funds in our database with DEO holdings at the end of June.
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Tom Gayner
Tom Gayner of Markel Gayner Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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. You can subscribe to our free daily newsletter on our website. Now we're going to go over the recent hedge fund action regarding Diageo plc (NYSE:DEO).
Do Hedge Funds Think DEO Is A Good Stock To Buy Now?
At Q3's end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. On the other hand, there were a total of 22 hedge funds with a bullish position in DEO a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
The largest stake in Diageo plc (NYSE:DEO) was held by Markel Gayner Asset Management, which reported holding $185.8 million worth of stock at the end of September. It was followed by GAMCO Investors with a $49.3 million position. Other investors bullish on the company included Orbis Investment Management, Fisher Asset Management, and 683 Capital Partners. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to Diageo plc (NYSE:DEO), around 3.15% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, setting aside 2.2 percent of its 13F equity portfolio to DEO.
Seeing as Diageo plc (NYSE:DEO) has faced falling interest from hedge fund managers, it's easy to see that there were a few hedge funds who were dropping their positions entirely last quarter. At the top of the heap, Ken Griffin's Citadel Investment Group cut the biggest stake of the "upper crust" of funds tracked by Insider Monkey, comprising close to $12.3 million in stock. Ryan Tolkin (CIO)'s fund, Schonfeld Strategic Advisors, also cut its stock, about $1.3 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 1 funds last quarter.
Let's now take a look at hedge fund activity in other stocks similar to Diageo plc (NYSE:DEO). We will take a look at HSBC Holdings plc (NYSE:HSBC), Gilead Sciences, Inc. (NASDAQ:GILD), The Estee Lauder Companies Inc (NYSE:EL), Target Corporation (NYSE:TGT), Zoetis Inc (NYSE:ZTS), Stryker Corporation (NYSE:SYK), and CVS Health Corporation (NYSE:CVS). This group of stocks' market valuations are similar to DEO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HSBC,10,276252,0 GILD,61,1989449,-7 EL,46,1518782,0 TGT,57,3952738,3 ZTS,58,2248300,0 SYK,48,1718729,-2 CVS,61,1171666,-4 Average,48.7,1839417,-1.4 [/table]
As you can see these stocks had an average of 48.7 hedge funds with bullish positions and the average amount invested in these stocks was $1839 million. That figure was $466 million in DEO's case. Gilead Sciences, Inc. (NASDAQ:GILD) is the most popular stock in this table. On the other hand HSBC Holdings plc (NYSE:HSBC) is the least popular one with only 10 bullish hedge fund positions. Diageo plc (NYSE:DEO) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DEO is 35.6. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. A small number of hedge funds were also right about betting on DEO as the stock returned 15.8% since the end of the third quarter (through 12/14) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.
