Bank of America shares a simple stock-trading strategy with a track record of repeatedly beating the market — including the 20 companies that best exploit it now

  • Savita Subramanian, the head of US equity and quantitative strategy for Bank of America, says betting against the top picks of hedge funds can be a surprisingly profitable tactic.
  • She says that betting against the top 10 overweights of actively managed hedge funds and buying the stocks the hedge funds like the least has been a way to beat the market recently.  
  • Hedge funds' top picks have offered mixed performance in recent months.
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Some days it's just more fun to be a contrarian and say "no" when everyone else is saying "yes." Fortunately, you can make money that way, too.

Bank of America says there's a pretty simple way to do it based on the choices made by the managers of active hedge funds. Yes, you can copy their strategies and make money when they do, but you can also bet against them and wait for the laws of markets and gravity to profit when the least-loved stocks start to outperform.

"Buying the 10 most underweight stocks and selling the 10 most overweight stocks by active funds has generated alpha in most years," wrote Savita Subramanian, the head of US equity and quantitative strategy, in a note to clients.

That advice might be extra-timely today. At RBC, Head of US Equity Strategy Lori Calvasina notes that the performance of the stocks hedge funds own the most of has been "choppy" this year, underperforming the market in May, pulling ahead from June and mid-July, slipping again, and most recently trading about even with the market.

Subramanian and her team write that employing that strategy has produced alpha, or above-market returns, in recent years. That's illustrated by this chart.

With the strategy's credentials laid out, here are the 10 stocks that BofA finds hedge funds are the most exposed to as determined by their reported long exposure minus their estimated short exposure.

Energy and healthcare comprise most of this list, as the top 10 in descending order of exposure is Baker Hughes, Netflix, Northrop Grumman, NetApp, Vertex Pharmaceuticals, Cigna, Chipotle Mexican Grill, Hess, EOG Resources, and Regeneron Pharmaceuticals.

Those are the stocks that could underperform based on recent history.

Meanwhile real estate is heavily represented among the stocks with the least hedge fund exposure. From most to least underweight, those stocks are Apartment Investment & Management, Federal Realty Investment, Tiffany, Regency Centers, Leggett & Platt, W.R. Berkley, UDR, Ford, A.O. Smith, and WEC Energy Group.

If the same pattern holds, those less-beloved stocks could outperform going forward.

Read more:

  • GOLDMAN SACHS: These 24 single-stock trades can help you make big returns in August as the pandemic creates a wildly unpredictable back-to-school season
  • JPMorgan says buy these 19 'diamond in the rough' stocks that have plunged from yearly highs, but are spring-loaded for huge gains ahead
  • Tom Marsico's global fund has crushed its benchmark for 13 years — and returned 28 times its peers in 2020. Here's what he's been buying, and the beaten-down stocks he plans to grab after the pandemic.

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Get the latest Bank of America stock price here.

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