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. Keeping this in mind, let’s take a look at whether Canadian National Railway Company (NYSE:CNI) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Hedge fund interest in Canadian National Railway Company (NYSE:CNI) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Zoetis Inc (NYSE:ZTS), Boston Scientific Corporation (NYSE:BSX), and Allergan plc (NYSE:AGN) to gather more data points. Our calculations also showed that CNI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Israel Englander of Millennium Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and even go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the fresh hedge fund action encompassing Canadian National Railway Company (NYSE:CNI).
What does smart money think about Canadian National Railway Company (NYSE:CNI)?
At the end of the fourth quarter, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 24 hedge funds with a bullish position in CNI a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Among these funds, Bill & Melinda Gates Foundation Trust held the most valuable stake in Canadian National Railway Company (NYSE:CNI), which was worth $1549.1 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $124.4 million worth of shares. Renaissance Technologies, Millennium Management, and Echo Street Capital Management 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 Bill & Melinda Gates Foundation Trust allocated the biggest weight to Canadian National Railway Company (NYSE:CNI), around 7.25% of its 13F portfolio. Heronetta Management is also relatively very bullish on the stock, designating 4.05 percent of its 13F equity portfolio to CNI.
Because Canadian National Railway Company (NYSE:CNI) has faced a decline in interest from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of hedge funds that elected to cut their positions entirely by the end of the third quarter. Interestingly, Richard Chilton’s Chilton Investment Company dumped the biggest position of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $2.9 million in stock, and Matthew Tewksbury’s Stevens Capital Management was right behind this move, as the fund said goodbye to about $1.1 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s also examine hedge fund activity in other stocks similar to Canadian National Railway Company (NYSE:CNI). These stocks are Zoetis Inc (NYSE:ZTS), Boston Scientific Corporation (NYSE:BSX), Allergan plc (NYSE:AGN), and VMware, Inc. (NYSE:VMW). This group of stocks’ market caps resemble CNI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ZTS | 48 | 2230316 | -5 |
| BSX | 54 | 3207627 | 2 |
| AGN | 86 | 9927657 | 2 |
| VMW | 33 | 777041 | -4 |
| Average | 55.25 | 4035660 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 55.25 hedge funds with bullish positions and the average amount invested in these stocks was $4036 million. That figure was $2001 million in CNI’s case. Allergan plc (NYSE:AGN) is the most popular stock in this table. On the other hand VMware, Inc. (NYSE:VMW) is the least popular one with only 33 bullish hedge fund positions. Compared to these stocks Canadian National Railway Company (NYSE:CNI) is even less popular than VMW. 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 managed to beat the market by 3.1 percentage points. A small number of hedge funds were also right about betting on CNI, though not to the same extent, as the stock returned -14% during the same time period and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
