While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding International Business Machines Corp. (NYSE:IBM) and see how the stock performed in comparison to hedge funds’ consensus picks.
International Business Machines Corp. (NYSE:IBM) has seen a decrease in hedge fund interest lately. IBM was in 42 hedge funds’ portfolios at the end of the third quarter of 2019. There were 45 hedge funds in our database with IBM holdings at the end of the previous quarter. Our calculations also showed that IBM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a look at the recent hedge fund action encompassing International Business Machines Corp. (NYSE:IBM).
How are hedge funds trading International Business Machines Corp. (NYSE:IBM)?
At the end of the third quarter, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards IBM over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in International Business Machines Corp. (NYSE:IBM) was held by AQR Capital Management, which reported holding $435.8 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $416.3 million position. Other investors bullish on the company included Adage Capital Management, Two Sigma Advisors, and Winton Capital Management. In terms of the portfolio weights assigned to each position Beddow Capital Management allocated the biggest weight to International Business Machines Corp. (NYSE:IBM), around 5.17% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, setting aside 3.18 percent of its 13F equity portfolio to IBM.
Judging by the fact that International Business Machines Corp. (NYSE:IBM) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds who sold off their positions entirely in the third quarter. Interestingly, Karim Abbadi and Edward McBride’s Centiva Capital said goodbye to the largest stake of all the hedgies followed by Insider Monkey, valued at about $2.5 million in stock. Anthony Scaramucci’s fund, Skybridge Capital, also cut its stock, about $2.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds in the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as International Business Machines Corp. (NYSE:IBM) but similarly valued. These stocks are Costco Wholesale Corporation (NASDAQ:COST), BHP Billiton Limited (NYSE:BHP), Accenture Plc (NYSE:ACN), and Novo Nordisk A/S (NYSE:NVO). This group of stocks’ market caps resemble IBM’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| COST | 51 | 3861914 | 11 |
| BHP | 21 | 800372 | 2 |
| ACN | 42 | 1120846 | 4 |
| NVO | 21 | 3007327 | 4 |
| Average | 33.75 | 2197615 | 5.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $2198 million. That figure was $1570 million in IBM’s case. Costco Wholesale Corporation (NASDAQ:COST) is the most popular stock in this table. On the other hand BHP Billiton Limited (NYSE:BHP) is the least popular one with only 21 bullish hedge fund positions. International Business Machines Corp. (NYSE:IBM) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately IBM wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on IBM were disappointed as the stock returned 25% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
