It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like DXC Technology Company (NYSE:DXC).
DXC Technology Company (NYSE:DXC) was in 34 hedge funds’ portfolios at the end of September. DXC investors should pay attention to a decrease in hedge fund sentiment in recent months. There were 41 hedge funds in our database with DXC positions at the end of the previous quarter. Our calculations also showed that DXC 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.
Larry Robbins of Glenview Capital
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 let’s take a look at the recent hedge fund action encompassing DXC Technology Company (NYSE:DXC).
How have hedgies been trading DXC Technology Company (NYSE:DXC)?
At Q3’s end, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the second quarter of 2019. By comparison, 50 hedge funds held shares or bullish call options in DXC a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Glenview Capital was the largest shareholder of DXC Technology Company (NYSE:DXC), with a stake worth $348 million reported as of the end of September. Trailing Glenview Capital was Maverick Capital, which amassed a stake valued at $323.3 million. AQR Capital Management, D E Shaw, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Atlantic Investment Management allocated the biggest weight to DXC Technology Company (NYSE:DXC), around 16.9% of its 13F portfolio. Clearline Capital is also relatively very bullish on the stock, dishing out 12.23 percent of its 13F equity portfolio to DXC.
Due to the fact that DXC Technology Company (NYSE:DXC) has witnessed declining sentiment from hedge fund managers, it’s safe to say that there was a specific group of funds that slashed their full holdings heading into Q4. Interestingly, Paul Singer’s Elliott Management said goodbye to the biggest stake of the 750 funds watched by Insider Monkey, valued at an estimated $121.3 million in stock, and David Gallo’s Valinor Management was right behind this move, as the fund cut about $60.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 7 funds heading into Q4.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as DXC Technology Company (NYSE:DXC) but similarly valued. These stocks are Assurant, Inc. (NYSE:AIZ), Graco Inc. (NYSE:GGG), Hyatt Hotels Corporation (NYSE:H), and Fortune Brands Home & Security Inc (NYSE:FBHS). All of these stocks’ market caps are closest to DXC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AIZ | 27 | 905471 | -2 |
| GGG | 19 | 187451 | -5 |
| H | 28 | 932324 | 5 |
| FBHS | 33 | 555866 | 2 |
| Average | 26.75 | 645278 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $645 million. That figure was $1145 million in DXC’s case. Fortune Brands Home & Security Inc (NYSE:FBHS) is the most popular stock in this table. On the other hand Graco Inc. (NYSE:GGG) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks DXC Technology Company (NYSE:DXC) is more popular among hedge funds. 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 DXC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DXC were disappointed as the stock returned -28% so far in 2019 (through 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019.
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.
