HP Inc. (HPQ): Were Hedge Funds Right?

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 (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 835 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about HP Inc. (NYSE:HPQ).

HP Inc. (NYSE:HPQ) shareholders have witnessed an increase in activity from the world’s largest hedge funds of late. HPQ was in 49 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 41 hedge funds in our database with HPQ positions at the end of the previous quarter. Our calculations also showed that HPQ isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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.

Seth Klarman of Baupost Group

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 this one. 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 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 gander at the latest hedge fund action surrounding HP Inc. (NYSE:HPQ).

Hedge fund activity in HP Inc. (NYSE:HPQ)

At Q4’s end, a total of 49 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HPQ over the last 18 quarters. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Carl Icahn’s Icahn Capital LP has the number one position in HP Inc. (NYSE:HPQ), worth close to $1.2927 billion, comprising 4.9% of its total 13F portfolio. Sitting at the No. 2 spot is Seth Klarman of Baupost Group, with a $205.5 million position; 2.3% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that are bullish include John Overdeck and David Siegel’s Two Sigma Advisors, Ken Griffin’s Citadel Investment Group and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Fort Baker Capital Management allocated the biggest weight to HP Inc. (NYSE:HPQ), around 10.92% of its 13F portfolio. Icahn Capital LP is also relatively very bullish on the stock, earmarking 4.94 percent of its 13F equity portfolio to HPQ.

Now, some big names have jumped into HP Inc. (NYSE:HPQ) headfirst. Baupost Group, managed by Seth Klarman, created the most outsized position in HP Inc. (NYSE:HPQ). Baupost Group had $205.5 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $45.5 million position during the quarter. The following funds were also among the new HPQ investors: Carl Tiedemann and Michael Tiedemann’s TIG Advisors, Dmitry Balyasny’s Balyasny Asset Management, and Clint Carlson’s Carlson Capital.

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 eBay Inc (NASDAQ:EBAY), Atlassian Corporation Plc (NASDAQ:TEAM), AvalonBay Communities Inc (NYSE:AVB), and Canon Inc. (NYSE:CAJ). This group of stocks’ market caps resemble HPQ’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 36 hedge funds with bullish positions and the average amount invested in these stocks was $1696 million. That figure was $2547 million in HPQ’s case. Atlassian Corporation Plc (NASDAQ:TEAM) is the most popular stock in this table. On the other hand Canon Inc. (NYSE:CAJ) is the least popular one with only 8 bullish hedge fund positions. HP Inc. (NYSE:HPQ) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately HPQ wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HPQ were disappointed as the stock returned -27.7% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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.