Stock Ranking According To Hedge Fund Investing (Part 2)

by: Rico Silvetti

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Hedge funds and institutional investors must publish their investment activity each quarter for all the world to see. There are many websites which will give you access to various degrees of this knowledge for your potential gain. What I am sharing is my personal belief about how best to use this information. The two main factors I use are as follows:

1. Net Market Value Bought. This is the total market value of an individual stock purchased by the professionals less any market value sold. Obviously larger is better, as it shows that a great deal of money was bought in that stock vs. sold. Each quarter I rank stocks and assign them a score from 0-100%, with 100% representing the largest market value bought stock, and 0 the worst. I do the same scoring for the 2nd factor:

2. Price drop as % (relative to global stock index). Since our information is delayed by approximately 45 days, and also the 3 month quarter, I subjectively select the most likely average price that each stock would have been purchased at by the pros, calculate the change from that price as a %, then I assign a score from 0-100%, where 100% is a stock that has dropped by the most. The bottom line is I prefer getting a stock that's gone down 20% vs. one that has gone up 20%, since I'm getting a better value for my purchase price. I throw out many stocks that clearly have already taken off to the upside. I'm not a trend follower. I seek stocks that I can buy cheaper than the pros have.

As I disclosured in the original article, I took positions in 12 stocks about 3 months ago in various amounts pursuant to this data. In the following table I list their symbols and their corresponding net alphas relative to Vanguard's Total World Index (NYSEARCA:VT):


Net Alpha

HCA Holdings (NYSE:HCA)


Motorola Mobility (NYSE:MMI)


Schlumberger Ltd. (NYSE:SLB)


Wells & Fargo (NYSE:WFC)


ConocoPhillips (NYSE:COP)






Chevron (NYSE:CVX)


Exxon Mobile (NYSE:XOM)


JP Morgan Chase (NYSE:JPM)


Pfizer (NYSE:PFE)


Disney (NYSE:DIS)


This portfolio of 12 stocks returned about -7% during the past 3 months, compared to about -13% for the total world stock index VT, a 6% alpha. Motorola was the shining star. Perhaps the pros knew a little more about the pending acquisition by Google than the rest of us.

I've only scoured and found 3 buys for this quarter, shown below in a table with a recommended position size as a % of portfolio in the 3rd column. I use 1% of portfolio as a standard position size and you might notice I've been using an arbitrary $300K portfolio for purposes of calculation in these articles. You can see these dollar figure positions sizes in column 2. 0.69% of $300K is a $2059 position size for example.

Covidien (COV)



TE Connectivity (NYSE:TEL)



American International Group (NYSE:AIG)



TEL is TE connectivity and COV is Covidien for clarity, since those symbols have other smaller companies attached to them.

It could take awhile to generate a significant enough sample size of stocks and data to make meaningful comparisons, but a 6% alpha vs. the stock market is a solid beating. And why shouldn't it be? The aggregate buying of a stock by the largest amount of professional traders that we can then purchase at a discount certainly sounds like the best kind of alpha you can find. And I for one am sick of the seeking.

Disclosure: I am long TEL, AIG, COV. I hold a long position of about 1% of my portfolio in all 15 of the stocks mentioned in this article, including 8/22/11 buys of TEL, AIG, and COV.