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- Bank of America's Savita Subramanian says there's a group of stocks that have done surprisingly well this earnings season: Companies that hedge funds are underweighting.
- She writes that those stocks are outperforming when their results are good. And when the earnings are disappointing, they're still beating the broader market the following day.
- Subramanian says there just aren't many other ways to beat the market right now.
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Making an investment that pays off is satisfying, but profiting from someone else's mistakes might be even better.
Savita Subramanian, the head of US equity and US quantitative strategy for Bank of America, says that with stocks at all-time highs, that might actually be the best way to get an advantage. She writes that stocks overlooked and under-owned by large institutional investors are delivering some of the biggest returns.
"Stocks neglected by hedge funds that beat on both top and bottom lines have generated 10x alpha compared to crowded stocks that beat," she said. "Neglected stocks that missed on both top and bottom lines still outperformed the S&P 500 the next day (+0.6%), while crowded stocks that missed were punished (-2.6%) far more than the average stock."
She adds that investors are in such an optimistic state of mind today that a solid earnings report, with better-than-expected profit and revenue, isn't generating much alpha.
Subramanian says the biggest opportunity is in these neglected stocks, meaning those that hedge funds are shorting the most relative to their weight in the S&P 500 index. They're ranked in ascending order based on how heavily the hedge funds are betting against them.
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