Hedge Funds Have Never Been This Bullish On Legg Mason, Inc. (LM)

Abigail Fisher

Sat, Mar 28, 2020, 6:53 PM 6 min read

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Legg Mason, Inc. (NYSE:LM) 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 Legg Mason, Inc. (NYSE:LM) the right pick for your portfolio? Investors who are in the know are taking an optimistic view. The number of long hedge fund positions moved up by 9 in recent months. Our calculations also showed that LM isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). LM was in 37 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 28 hedge funds in our database with LM holdings at the end of the previous quarter.

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 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 more than 41 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

[caption id="attachment_30574" align="aligncenter" width="399"]

Nelson Peltz of Trian Partners[/caption]

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's take a look at the key hedge fund action surrounding Legg Mason, Inc. (NYSE:LM).

How are hedge funds trading Legg Mason, Inc. (NYSE:LM)?

At Q4's end, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of 32% from the previous quarter. By comparison, 18 hedge funds held shares or bullish call options in LM a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Trian Partners was the largest shareholder of Legg Mason, Inc. (NYSE:LM), with a stake worth $139.4 million reported as of the end of September. Trailing Trian Partners was Citadel Investment Group, which amassed a stake valued at $70.8 million. GAMCO Investors, Renaissance Technologies, and Pzena Investment 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 Trian Partners allocated the biggest weight to Legg Mason, Inc. (NYSE:LM), around 1.47% of its 13F portfolio. Factorial Partners is also relatively very bullish on the stock, earmarking 0.84 percent of its 13F equity portfolio to LM.

As industrywide interest jumped, specific money managers were breaking ground themselves. GLG Partners, managed by Noam Gottesman, assembled the largest position in Legg Mason, Inc. (NYSE:LM). GLG Partners had $6.8 million invested in the company at the end of the quarter. Anand Parekh's Alyeska Investment Group also made a $5 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace's Marshall Wace LLP, Michael Gelband's ExodusPoint Capital, and Joel Greenblatt's Gotham Asset Management.

Let's check out hedge fund activity in other stocks similar to Legg Mason, Inc. (NYSE:LM). These stocks are Anixter International Inc. (NYSE:AXE), Old National Bancorp (NASDAQ:ONB), Novanta Inc. (NASDAQ:NOVT), and TC Pipelines, LP (NYSE:TCP). This group of stocks' market caps match LM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AXE,43,616473,23 ONB,14,37866,3 NOVT,14,88192,2 TCP,3,26792,-2 Average,18.5,192331,6.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $192 million. That figure was $434 million in LM's case. Anixter International Inc. (NYSE:AXE) is the most popular stock in this table. On the other hand TC Pipelines, LP (NYSE:TCP) is the least popular one with only 3 bullish hedge fund positions. Legg Mason, Inc. (NYSE:LM) is not the most popular stock in this group but hedge fund interest is still above average. 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 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. Hedge funds were also right about betting on LM as the stock returned 34.4% during the first quarter (through March 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.