Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves. In this article, we look at what those funds think of CDW Corporation (NASDAQ:CDW) based on that data.
Is CDW Corporation (NASDAQ:CDW) a buy here? The best stock pickers are taking a pessimistic view. The number of bullish hedge fund bets decreased by 3 recently. Our calculations also showed that CDW 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).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Keeping this in mind we’re going to review the latest hedge fund action regarding CDW Corporation (NASDAQ:CDW).
How have hedgies been trading CDW Corporation (NASDAQ:CDW)?
At Q3’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. On the other hand, there were a total of 28 hedge funds with a bullish position in CDW a year ago. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Robert Joseph Caruso’s Select Equity Group has the biggest position in CDW Corporation (NASDAQ:CDW), worth close to $480.5 million, accounting for 3.3% of its total 13F portfolio. Sitting at the No. 2 spot is AQR Capital Management, led by Cliff Asness, holding a $289.7 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions consist of Thomas Bancroft’s Makaira Partners, Noam Gottesman’s GLG Partners and Renaissance Technologies. In terms of the portfolio weights assigned to each position Makaira Partners allocated the biggest weight to CDW Corporation (NASDAQ:CDW), around 17.98% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, earmarking 3.25 percent of its 13F equity portfolio to CDW.
Seeing as CDW Corporation (NASDAQ:CDW) has faced a decline in interest from hedge fund managers, logic holds that there exists a select few hedgies that slashed their positions entirely last quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the biggest stake of the 750 funds watched by Insider Monkey, valued at about $55.3 million in stock. Israel Englander’s fund, Millennium Management, also sold off its stock, about $32.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to CDW Corporation (NASDAQ:CDW). These stocks are CBRE Group, Inc. (NYSE:CBRE), Western Digital Corporation (NASDAQ:WDC), New Oriental Education & Tech Group Inc. (NYSE:EDU), and HCP, Inc. (NYSE:HCP). This group of stocks’ market values match CDW’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CBRE | 27 | 1095686 | 2 |
| WDC | 35 | 905397 | 10 |
| EDU | 35 | 1511145 | 3 |
| HCP | 25 | 562264 | -1 |
| Average | 30.5 | 1018623 | 3.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 30.5 hedge funds with bullish positions and the average amount invested in these stocks was $1019 million. That figure was $1168 million in CDW’s case. Western Digital Corporation (NASDAQ:WDC) is the most popular stock in this table. On the other hand HCP, Inc. (NYSE:HCP) is the least popular one with only 25 bullish hedge fund positions. CDW Corporation (NASDAQ:CDW) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. A small number of hedge funds were also right about betting on CDW as the stock returned 78.2% in 2019 and outclassed the market by an even larger margin.
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.
