We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
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 see whether Xylem Inc (NYSE:XYL) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Is Xylem Inc (NYSE:XYL) a buy, sell, or hold? The best stock pickers are betting on the stock. The number of long hedge fund positions inched up by 1 recently. Our calculations also showed that XYL isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). XYL was in 21 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 20 hedge funds in our database with XYL positions at the end of the previous quarter.
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 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.
Mario Gabelli of GAMCO Investors
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 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. With all of this in mind we’re going to take a peek at the key hedge fund action regarding Xylem Inc (NYSE:XYL).
What does smart money think about Xylem Inc (NYSE:XYL)?
Heading into the first quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in XYL over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Impax Asset Management was the largest shareholder of Xylem Inc (NYSE:XYL), with a stake worth $359.3 million reported as of the end of September. Trailing Impax Asset Management was GAMCO Investors, which amassed a stake valued at $110.1 million. Millennium Management, Citadel Investment 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 Impax Asset Management allocated the biggest weight to Xylem Inc (NYSE:XYL), around 4.01% of its 13F portfolio. GAMCO Investors is also relatively very bullish on the stock, setting aside 0.88 percent of its 13F equity portfolio to XYL.
As one would reasonably expect, key money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, assembled the most outsized position in Xylem Inc (NYSE:XYL). Millennium Management had $17.9 million invested in the company at the end of the quarter. Bruce Kovner’s Caxton Associates LP also initiated a $2.7 million position during the quarter. The other funds with brand new XYL positions are Joel Greenblatt’s Gotham Asset Management, Alec Litowitz and Ross Laser’s Magnetar Capital, and Ray Dalio’s Bridgewater Associates.
Let’s now take a look at hedge fund activity in other stocks similar to Xylem Inc (NYSE:XYL). We will take a look at Broadridge Financial Solutions, Inc. (NYSE:BR), NVR, Inc. (NYSE:NVR), Phillips 66 Partners LP (NYSE:PSXP), and Hologic, Inc. (NASDAQ:HOLX). This group of stocks’ market values are closest to XYL’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BR | 35 | 343414 | 4 |
| NVR | 30 | 1060404 | -8 |
| PSXP | 5 | 22709 | 0 |
| HOLX | 41 | 1500424 | 5 |
| Average | 27.75 | 731738 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $732 million. That figure was $555 million in XYL’s case. Hologic, Inc. (NASDAQ:HOLX) is the most popular stock in this table. On the other hand Phillips 66 Partners LP (NYSE:PSXP) is the least popular one with only 5 bullish hedge fund positions. Xylem Inc (NYSE:XYL) is not the least popular stock in this group but hedge fund interest is still below average. 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 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on XYL as the stock returned -17.2% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
