Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We at Insider Monkey have gone over 835 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of December 31st. In this article, we look at what those funds think of 3M Company (NYSE:MMM) based on that data.
Is 3M Company (NYSE:MMM) a buy here? The smart money is taking a pessimistic view. The number of long hedge fund positions dropped by 6 lately. Our calculations also showed that MMM isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). MMM was in 46 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 52 hedge funds in our database with MMM holdings at the end of the previous quarter.
Video: Click the image to 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 41 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.
John Overdeck of Two Sigma Advisors
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, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Now we’re going to check out the new hedge fund action surrounding 3M Company (NYSE:MMM).
How are hedge funds trading 3M Company (NYSE:MMM)?
Heading into the first quarter of 2020, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the third quarter of 2019. On the other hand, there were a total of 36 hedge funds with a bullish position in MMM a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
More specifically, Two Sigma Advisors was the largest shareholder of 3M Company (NYSE:MMM), with a stake worth $329 million reported as of the end of September. Trailing Two Sigma Advisors was Citadel Investment Group, which amassed a stake valued at $123.5 million. Adage Capital Management, AQR Capital Management, and D E Shaw 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 Southport Management allocated the biggest weight to 3M Company (NYSE:MMM), around 4.3% of its 13F portfolio. Jade Capital Advisors is also relatively very bullish on the stock, earmarking 1.93 percent of its 13F equity portfolio to MMM.
Judging by the fact that 3M Company (NYSE:MMM) has experienced falling interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of money managers that slashed their full holdings in the third quarter. Intriguingly, Renaissance Technologies sold off the largest position of the 750 funds followed by Insider Monkey, worth an estimated $17.6 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also cut its stock, about $10 million worth. These transactions are interesting, as total hedge fund interest fell by 6 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as 3M Company (NYSE:MMM) but similarly valued. We will take a look at QUALCOMM, Incorporated (NASDAQ:QCOM), United Parcel Service, Inc. (NYSE:UPS), Rio Tinto plc (NYSE:RIO), and General Electric Company (NYSE:GE). This group of stocks’ market valuations match MMM’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| QCOM | 67 | 3090818 | 7 |
| UPS | 42 | 975024 | -3 |
| RIO | 21 | 1680869 | -1 |
| GE | 60 | 6210817 | 2 |
| Average | 47.5 | 2989382 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 47.5 hedge funds with bullish positions and the average amount invested in these stocks was $2989 million. That figure was $856 million in MMM’s case. QUALCOMM, Incorporated (NASDAQ:QCOM) is the most popular stock in this table. On the other hand Rio Tinto plc (NYSE:RIO) is the least popular one with only 21 bullish hedge fund positions. 3M Company (NYSE:MMM) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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. These stocks lost 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately MMM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MMM investors were disappointed as the stock returned -15.8% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
Disclosure: None. This article was originally published at Insider Monkey.
