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

Reymerlyn Martin
·6 min read

In this article we are going to use hedge fund sentiment as a tool and determine whether TransDigm Group Incorporated (NYSE:TDG) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is TransDigm Group Incorporated (NYSE:TDG) a buy here? The smart money was getting more optimistic. The number of long hedge fund bets went up by 4 recently. TransDigm Group Incorporated (NYSE:TDG) was in 62 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 63. Our calculations also showed that TDG 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.

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.

Sahm Adrangi Kerrisdale Capital
Sahm Adrangi Kerrisdale Capital

Sahm Adrangi of Kerrisdale 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. Keeping this in mind let's go over the recent hedge fund action surrounding TransDigm Group Incorporated (NYSE:TDG).

How have hedgies been trading TransDigm Group Incorporated (NYSE:TDG)?

At second quarter's end, a total of 62 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from one quarter earlier. By comparison, 48 hedge funds held shares or bullish call options in TDG a year ago. With the smart money's capital changing hands, there exists a select group of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

More specifically, Windacre Partnership was the largest shareholder of TransDigm Group Incorporated (NYSE:TDG), with a stake worth $777.8 million reported as of the end of September. Trailing Windacre Partnership was Tiger Global Management LLC, which amassed a stake valued at $776.8 million. Lone Pine Capital, Stockbridge Partners, and AltaRock Partners 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 AltaRock Partners allocated the biggest weight to TransDigm Group Incorporated (NYSE:TDG), around 27.02% of its 13F portfolio. Windacre Partnership is also relatively very bullish on the stock, setting aside 23.36 percent of its 13F equity portfolio to TDG.

With a general bullishness amongst the heavyweights, some big names have jumped into TransDigm Group Incorporated (NYSE:TDG) headfirst. Yiheng Capital, managed by Jonathan Guo, initiated the biggest position in TransDigm Group Incorporated (NYSE:TDG). Yiheng Capital had $109.8 million invested in the company at the end of the quarter. Jonathan Auerbach's Hound Partners also initiated a $69.4 million position during the quarter. The following funds were also among the new TDG investors: Sahm Adrangi's Kerrisdale Capital, David Thomas's Atalan Capital, and Steve Cohen's Point72 Asset Management.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as TransDigm Group Incorporated (NYSE:TDG) but similarly valued. These stocks are McCormick & Company, Incorporated (NYSE:MKC), Verisign, Inc. (NASDAQ:VRSN), Moderna, Inc. (NASDAQ:MRNA), Motorola Solutions Inc (NYSE:MSI), V.F. Corporation (NYSE:VFC), Parker-Hannifin Corporation (NYSE:PH), and Twitter Inc (NYSE:TWTR). This group of stocks' market valuations are similar to TDG's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MKC,32,251773,1 VRSN,47,6245654,6 MRNA,37,788433,12 MSI,36,535822,2 VFC,27,558958,8 PH,39,1172205,7 TWTR,68,1278023,13 Average,40.9,1547267,7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.9 hedge funds with bullish positions and the average amount invested in these stocks was $1547 million. That figure was $6066 million in TDG's case. Twitter Inc (NYSE:TWTR) is the most popular stock in this table. On the other hand V.F. Corporation (NYSE:VFC) is the least popular one with only 27 bullish hedge fund positions. TransDigm Group Incorporated (NYSE:TDG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TDG is 81.2. 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 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately TDG wasn't nearly as popular as these 10 stocks and hedge funds that were betting on TDG were disappointed as the stock returned 11.3% since the end of June (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 many of these stocks already outperformed the market so far this year.

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

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