Do These Hedge Funds Regret Dumping Dow Inc. (DOW)?

In this article you are going to find out whether hedge funds think Dow Inc. (NYSE:DOW) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Dow Inc. (NYSE:DOW) investors should be aware of a decrease in hedge fund interest in recent months. Dow Inc. (NYSE:DOW) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 38. There were 38 hedge funds in our database with DOW positions at the end of the first quarter. Our calculations also showed that DOW 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. 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. With all of this in mind we’re going to go over the new hedge fund action encompassing Dow Inc. (NYSE:DOW).

How are hedge funds trading Dow Inc. (NYSE:DOW)?

Heading into the third quarter of 2020, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DOW over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Dow Inc. (NYSE:DOW) was held by Pzena Investment Management, which reported holding $262 million worth of stock at the end of June. It was followed by Arrowstreet Capital with a $70.3 million position. Other investors bullish on the company included Citadel Investment Group, Citadel Investment Group, and Winton Capital Management. In terms of the portfolio weights assigned to each position Appian Way Asset Management allocated the biggest weight to Dow Inc. (NYSE:DOW), around 2.27% of its 13F portfolio. Pzena Investment Management is also relatively very bullish on the stock, setting aside 1.71 percent of its 13F equity portfolio to DOW.

Judging by the fact that Dow Inc. (NYSE:DOW) has experienced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there is a sect of money managers that elected to cut their full holdings by the end of the second quarter. At the top of the heap, Renaissance Technologies cut the biggest investment of the “upper crust” of funds watched by Insider Monkey, totaling close to $28.8 million in stock. Phill Gross and Robert Atchinson’s fund, Adage Capital Management, also sold off its stock, about $25 million worth. These moves are interesting, as aggregate hedge fund interest fell by 3 funds by the end of the second quarter.

Let’s also examine hedge fund activity in other stocks similar to Dow Inc. (NYSE:DOW). We will take a look at KLA Corporation (NASDAQ:KLAC), ICICI Bank Limited (NYSE:IBN), IHS Markit Ltd. (NYSE:INFO), Canadian Imperial Bank of Commerce (NYSE:CM), EOG Resources Inc (NYSE:EOG), Royalty Pharma plc (NASDAQ:RPRX), and Seagen Inc. (NASDAQ:SGEN). This group of stocks’ market valuations resemble DOW’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.6 hedge funds with bullish positions and the average amount invested in these stocks was $2061 million. That figure was $452 million in DOW’s case. EOG Resources Inc (NYSE:EOG) is the most popular stock in this table. On the other hand Canadian Imperial Bank of Commerce (NYSE:CM) is the least popular one with only 6 bullish hedge fund positions. Dow Inc. (NYSE:DOW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DOW is 66.8. 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. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on DOW as the stock returned 13.3% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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