Hedge Funds Are Flocking Into VMware, Inc. (VMW)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards VMware, Inc. (NYSE:VMW) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is VMware, Inc. (NYSE:VMW) a buy here? The best stock pickers were taking an optimistic view. The number of long hedge fund bets rose by 15 recently. VMware, Inc. (NYSE:VMW) was in 42 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 43. Our calculations also showed that VMW 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). There were 27 hedge funds in our database with VMW positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by 58 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 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.

Fred DiSanto of Ancora Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind let’s analyze the key hedge fund action encompassing VMware, Inc. (NYSE:VMW).

Hedge fund activity in VMware, Inc. (NYSE:VMW)

At the end of June, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 56% from the previous quarter. By comparison, 34 hedge funds held shares or bullish call options in VMW a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of VMware, Inc. (NYSE:VMW), with a stake worth $121.7 million reported as of the end of September. Trailing Renaissance Technologies was Citadel Investment Group, which amassed a stake valued at $116.9 million. Antipodes Partners, GMT Capital, and Two Sigma Advisors 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 GMT Capital allocated the biggest weight to VMware, Inc. (NYSE:VMW), around 4.34% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, designating 4.16 percent of its 13F equity portfolio to VMW.

Consequently, key hedge funds were breaking ground themselves. Antipodes Partners, managed by Jacob Mitchell, created the biggest position in VMware, Inc. (NYSE:VMW). Antipodes Partners had $91.8 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $32.5 million position during the quarter. The other funds with new positions in the stock are Dmitry Balyasny’s Balyasny Asset Management, Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, and Michael Gelband’s ExodusPoint Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as VMware, Inc. (NYSE:VMW) but similarly valued. We will take a look at Automatic Data Processing (NASDAQ:ADP), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Canadian National Railway Company (NYSE:CNI), Colgate-Palmolive Company (NYSE:CL), China Petroleum & Chemical Corp (NYSE:SNP), Equinix Inc (NASDAQ:EQIX), and Advanced Micro Devices, Inc. (NASDAQ:AMD). This group of stocks’ market values match VMW’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.9 hedge funds with bullish positions and the average amount invested in these stocks was $1744 million. That figure was $696 million in VMW’s case. Advanced Micro Devices, Inc. (NASDAQ:AMD) is the most popular stock in this table. On the other hand China Petroleum & Chemical Corp (NYSE:SNP) is the least popular one with only 10 bullish hedge fund positions. VMware, Inc. (NYSE:VMW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VMW is 78.3. 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. 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 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately VMW wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VMW were disappointed as the stock returned -6.7% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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