Hedge Funds Losing Interest In HP Inc. (HPQ)

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards HP Inc. (NYSE:HPQ) and determine whether hedge funds skillfully traded this stock.

Is HP Inc. (NYSE:HPQ) the right investment to pursue these days? Investors who are in the know were taking a bearish view. The number of long hedge fund positions were trimmed by 8 recently. HP Inc. (NYSE:HPQ) was in 35 hedge funds’ portfolios at the end of June. The all time high for this statistics is 59. Our calculations also showed that HPQ 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 43 hedge funds in our database with HPQ holdings at the end of March.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Seth Klarman of Baupost Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we’re going to take a glance at the fresh hedge fund action surrounding HP Inc. (NYSE:HPQ).

What does smart money think about HP Inc. (NYSE:HPQ)?

At Q2’s end, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. By comparison, 32 hedge funds held shares or bullish call options in HPQ a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Baupost Group held the most valuable stake in HP Inc. (NYSE:HPQ), which was worth $313.8 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $259.4 million worth of shares. Arrowstreet Capital, Select Equity Group, 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 Baupost Group allocated the biggest weight to HP Inc. (NYSE:HPQ), around 3.92% of its 13F portfolio. Maso Capital is also relatively very bullish on the stock, setting aside 1.97 percent of its 13F equity portfolio to HPQ.

Judging by the fact that HP Inc. (NYSE:HPQ) has witnessed declining sentiment from the smart money, logic holds that there is a sect of hedgies who were dropping their full holdings last quarter. It’s worth mentioning that Carl Icahn’s Icahn Capital LP dumped the biggest stake of all the hedgies watched by Insider Monkey, totaling an estimated $1092 million in stock. Alec Litowitz and Ross Laser’s fund, Magnetar Capital, also said goodbye to its stock, about $148.3 million worth. These transactions are important to note, as total hedge fund interest fell by 8 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as HP Inc. (NYSE:HPQ) but similarly valued. We will take a look at McKesson Corporation (NYSE:MCK), Public Service Enterprise Group Incorporated (NYSE:PEG), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Credit Suisse Group AG (NYSE:CS), Nokia Corporation (NYSE:NOK), Zimmer Biomet Holdings Inc (NYSE:ZBH), and Rockwell Automation Inc. (NYSE:ROK). This group of stocks’ market values resemble HPQ’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 43 hedge funds with bullish positions and the average amount invested in these stocks was $1120 million. That figure was $1107 million in HPQ’s case. Zimmer Biomet Holdings Inc (NYSE:ZBH) is the most popular stock in this table. On the other hand Credit Suisse Group AG (NYSE:CS) is the least popular one with only 14 bullish hedge fund positions. HP Inc. (NYSE:HPQ) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HPQ is 36.7. 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 negative signal and 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 surpassed the market by 23.2 percentage points. Unfortunately HPQ wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HPQ investors were disappointed as the stock returned 12.2% since Q2 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 in 2020.

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