EMC Corporation (EMC): Smart Money is Confident Ahead of Dell Merger

It is common knowledge that there are numerous strategies for picking good stocks, but the art of stock-picking is quite cumbersome and complex for most investors. There are thousands of stocks to choose from, so how can individual investors select good stocks or at least avoid risky and bad stocks? Choosing stocks based on a particular criteria using stock screeners might represent a suitable option, but this method can eliminate some high-potential stocks that could possibly generate big trading profits. Before proceeding to the stock selection process, individual investors should clearly formulate the purpose of their portfolios. Depending on whether investors are looking to generate current income or capital appreciation, the pool of stock candidates can differ. Moving on to the stock selection process, investors can also select potential equity investments by examining the basket of most-favored stocks among top hedge fund managers. This basket includes both income and growth stocks, and both small-cap and large-cap stocks, so investors will definitely find something that suits their investment strategies. With this in mind, let’s take a look at the recent hedge fund activity surrounding EMC Corporation (NYSE:EMC).

Is EMC Corporation (NYSE:EMC) undervalued? Hedge funds appear to believe so in increasing numbers. The number of bullish hedge fund bets rose by 12 in recent months. EMC was in 77 hedge funds’ portfolios at the end of December. There were 65 hedge funds in our database with EMC holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Duke Energy Corp (NYSE:DUK), Netflix, Inc. (NASDAQ:NFLX), and The Bank of Nova Scotia (USA) (NYSE:BNS) to gather more data points.

Insider Monkey has spotted a number of investment strategies that have historically outpaced the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy surpassed the S&P 500 index by 12 percentage points per annum for a decade in their back tests (read more details here).

In October 2015, Dell Inc. announced that it had agreed to acquire EMC Corporation (NYSE:EMC) for roughly $67 billion, a “game-changer” deal that will create a powerhouse in the technology industry. The soon-to-be combined company will represent a leader in several high-growth sectors of the massive information technology market. Meanwhile, the merger has already received antitrust clearance from the U.S. Federal Trade Commission, European regulators, and regulatory agencies in several other countries, so the completion process of the deal is well underway. At the same time, Dell and EMC recently revealed the possible Executive leadership team of the future combined company, through an internal memo and a public filing with the SEC. Nonetheless, the transaction is still subject to approval by EMC’s shareholders, regulatory clearance in other jurisdictions and other customary closing conditions. There have also been reports that Dell is having trouble raising the capital to complete the deal, which poses another major hurdle. The shares of EMC have advanced by 2% since the beginning of the year.

Now, let’s analyze the key action encompassing EMC Corporation (NYSE:EMC) as well as an activist’s take on the forthcoming merger.

Paul Singer’s Elliott Management, which owns 42.23 million shares of EMC Corporation (NYSE:EMC) as of the end of December 2015, saluted the multi-billion-dollar merger, saying that “this landmark transaction will create a powerhouse with leading franchises across enterprise IT”. On the other hand, David Einhorn’s Greenlight Capital closed out its position in EMC Corporation (NYSE:EMC) during the second quarter of 2015, as it revealed in a second-quarter letter to investors. The billionaire investor wrote in the letter that “We exited our long position in EMC Corp. with a small profit given the reduced odds of any favorable change to the corporate structure and increasing concerns about a lack of growth in the storage business.”

What have hedge funds been doing with EMC Corporation (NYSE:EMC)?

Heading into 2016, a total of 77 of the hedge funds tracked by Insider Monkey were long this stock, a gain of 18% from one quarter earlier. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes meaningfully (or had already accumulated large positions).

Of the funds tracked by Insider Monkey, Mr. Singer’s Elliott Management has the largest position in EMC Corporation (NYSE:EMC), worth close to $1.08 billion, amounting to 13.1% of its total 13F portfolio. On Elliott Management’s heels is Seth Klarman of Baupost Group, with a $751.1 million position; 13.6% of his 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions consist of Nick Niell’s Arrowgrass Capital Partners, Matthew Halbower’s Pentwater Capital Management, and Eric Mindich’s Eton Park Capital.

As one would reasonably expect, key money managers were breaking ground themselves. Baupost Group, managed by Seth Klarman, assembled the biggest position in EMC Corporation (NYSE:EMC). Baupost Group had $751.1 million invested in the company at the end of the quarter. Nick Niell’s Arrowgrass Capital Partners also initiated a $516.3 million position during the quarter. The other funds with brand new EMC positions are Matthew Halbower’s Pentwater Capital Management, Eric Mindich’s Eton Park Capital, and Thomas Steyer’s Farallon Capital.

On the final page, we’ll compare EMC’s popularity to stocks with a similar market cap.

Let’s also examine hedge fund activity in other stocks similar to EMC Corporation (NYSE:EMC). We will take a look at Duke Energy Corp (NYSE:DUK), Netflix, Inc. (NASDAQ:NFLX), The Bank of Nova Scotia (USA) (NYSE:BNS), and PNC Financial Services (NYSE:PNC). This group of stocks’ market caps are similar to EMC’s market cap.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $2.42 billion. That figure was $6.86 billion in EMC’s case. Netflix, Inc. (NASDAQ:NFLX) is the most popular stock in this table. On the other hand Duke Energy Corp (NYSE:DUK) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks EMC Corporation (NYSE:EMC) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio, wary of the threat of the company’s merger with Dell potentially falling through.

Disclosure: None