Hedge Funds Are Souring On Canadian National Railway Company (CNI)?

In this article we will check out the progression of hedge fund sentiment towards Canadian National Railway Company (NYSE:CNI) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Canadian National Railway Company (NYSE:CNI) an exceptional investment right now? Investors who are in the know are turning less bullish. The number of long hedge fund bets went down by 3 lately. Our calculations also showed that CNI isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). CNI was in 26 hedge funds’ portfolios at the end of March. There were 29 hedge funds in our database with CNI positions at the end of the previous quarter.

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

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

David E. Shaw of D.E. Shaw

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like these. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a peek at the key hedge fund action encompassing Canadian National Railway Company (NYSE:CNI).

Hedge fund activity in Canadian National Railway Company (NYSE:CNI)

At Q1’s end, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CNI over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Bill & Melinda Gates Foundation Trust, managed by Michael Larson, holds the largest position in Canadian National Railway Company (NYSE:CNI). Bill & Melinda Gates Foundation Trust has a $1.3296 billion position in the stock, comprising 7.7% of its 13F portfolio. Sitting at the No. 2 spot is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $145.5 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish consist of D. E. Shaw’s D E Shaw, Ken Griffin’s Citadel Investment Group and Ray Dalio’s Bridgewater Associates. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Canadian National Railway Company (NYSE:CNI), around 7.66% of its 13F portfolio. Heronetta Management is also relatively very bullish on the stock, dishing out 6.96 percent of its 13F equity portfolio to CNI.

Because Canadian National Railway Company (NYSE:CNI) has faced bearish sentiment from hedge fund managers, it’s easy to see that there is a sect of hedge funds that decided to sell off their full holdings heading into Q4. At the top of the heap, Zach Schreiber’s Point State Capital cut the largest investment of the “upper crust” of funds watched by Insider Monkey, worth an estimated $2.5 million in stock. Ian Cumming and Joseph Steinberg’s fund, Leucadia National, also dumped its stock, about $1.7 million worth. These moves are interesting, as total hedge fund interest was cut by 3 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to Canadian National Railway Company (NYSE:CNI). We will take a look at Booking Holdings Inc. (NASDAQ:BKNG), Biogen Inc. (NASDAQ:BIIB), The Blackstone Group L.P. (NYSE:BX), and ServiceNow Inc (NYSE:NOW). This group of stocks’ market values resemble CNI’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 73.5 hedge funds with bullish positions and the average amount invested in these stocks was $3730 million. That figure was $1606 million in CNI’s case. Booking Holdings Inc. (NASDAQ:BKNG) is the most popular stock in this table. On the other hand The Blackstone Group L.P. (NYSE:BX) is the least popular one with only 49 bullish hedge fund positions. Compared to these stocks Canadian National Railway Company (NYSE:CNI) is even less popular than BX. Hedge funds dodged a bullet by taking a bearish stance towards CNI. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 8.3% in 2020 through the end of May but managed to beat the market by 13.2 percentage points. Unfortunately CNI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); CNI investors were disappointed as the stock returned 10.8% during the second quarter (through the end of May) 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 most of these stocks already outperformed the market so far in 2020.

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