Were Hedge Funds Right About Dumping Morgan Stanley (MS)?

Reymerlyn Martin
·6 min read

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Morgan Stanley (NYSE:MS).

Morgan Stanley (NYSE:MS) was in 61 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 70. MS has seen a decrease in activity from the world's largest hedge funds of late. There were 70 hedge funds in our database with MS positions at the end of the first quarter. Our calculations also showed that MS isn't 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jeff Ubben VALUEACT CAPITAL
Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Now let's take a peek at the recent hedge fund action surrounding Morgan Stanley (NYSE:MS).

How have hedgies been trading Morgan Stanley (NYSE:MS)?

Heading into the third quarter of 2020, a total of 61 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. By comparison, 60 hedge funds held shares or bullish call options in MS a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

More specifically, Eagle Capital Management was the largest shareholder of Morgan Stanley (NYSE:MS), with a stake worth $716.3 million reported as of the end of September. Trailing Eagle Capital Management was ValueAct Capital, which amassed a stake valued at $688.3 million. Greenhaven Associates, Fisher Asset Management, 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 Greenhaven Associates allocated the biggest weight to Morgan Stanley (NYSE:MS), around 10.15% of its 13F portfolio. Toscafund Asset Management is also relatively very bullish on the stock, setting aside 9.77 percent of its 13F equity portfolio to MS.

Since Morgan Stanley (NYSE:MS) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of hedge funds that elected to cut their entire stakes heading into Q3. At the top of the heap, Louis Bacon's Moore Global Investments sold off the largest stake of the 750 funds monitored by Insider Monkey, worth about $31.1 million in stock. John Overdeck and David Siegel's fund, Two Sigma Advisors, also cut its stock, about $27.2 million worth. These moves are important to note, as aggregate hedge fund interest fell by 9 funds heading into Q3.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Morgan Stanley (NYSE:MS) but similarly valued. These stocks are Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF), Mondelez International Inc (NASDAQ:MDLZ), Altria Group Inc (NYSE:MO), Zoom Video Communications, Inc. (NASDAQ:ZM), Becton, Dickinson and Company (NYSE:BDX), and Rio Tinto Group (NYSE:RIO). All of these stocks' market caps are similar to MS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VRTX,54,3477688,-2 KOF,5,358015,-2 MDLZ,54,2594722,0 MO,43,1289543,-3 ZM,48,6758811,1 BDX,53,1971353,-3 RIO,20,1324146,0 Average,39.6,2539183,-1.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.6 hedge funds with bullish positions and the average amount invested in these stocks was $2539 million. That figure was $4357 million in MS's case. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is the most popular stock in this table. On the other hand Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Morgan Stanley (NYSE:MS) is more popular among hedge funds. Our overall hedge fund sentiment score for MS is 72.1. 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 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Unfortunately MS wasn't nearly as popular as these 10 stocks and hedge funds that were betting on MS were disappointed as the stock returned 8.1% since the end of the second quarter (through 10/16) 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.

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