It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 15 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 19.7% during the first 2.5 months of 2019 (vs. 13.1% gain for SPY), with 93% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in BorgWarner Inc. (NYSE:BWA).
Hedge fund interest in BorgWarner Inc. (NYSE:BWA) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare BWA to other stocks including Tyler Technologies, Inc. (NYSE:TYL), Micro Focus Intl PLC (NYSE:MFGP), and SEI Investments Company (NASDAQ:SEIC) to get a better sense of its popularity.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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.
Let’s take a glance at the recent hedge fund action surrounding BorgWarner Inc. (NYSE:BWA).
How are hedge funds trading BorgWarner Inc. (NYSE:BWA)?
At the end of the fourth quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards BWA over the last 14 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Diamond Hill Capital was the largest shareholder of BorgWarner Inc. (NYSE:BWA), with a stake worth $344.2 million reported as of the end of September. Trailing Diamond Hill Capital was Ariel Investments, which amassed a stake valued at $60.3 million. D E Shaw, GAMCO Investors, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that BorgWarner Inc. (NYSE:BWA) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of money managers who sold off their positions entirely last quarter. At the top of the heap, Steve Cohen’s Point72 Asset Management said goodbye to the largest stake of the 700 funds watched by Insider Monkey, valued at about $56.3 million in call options. Alexander Mitchell’s fund, Scopus Asset Management, also dropped its call options, about $8.6 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks similar to BorgWarner Inc. (NYSE:BWA). These stocks are Tyler Technologies, Inc. (NYSE:TYL), Micro Focus Intl PLC (NYSE:MFGP), SEI Investments Company (NASDAQ:SEIC), and Paycom Software Inc (NYSE:PAYC). This group of stocks’ market valuations are closest to BWA’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TYL | 24 | 714336 | 2 |
| MFGP | 8 | 9232 | -2 |
| SEIC | 25 | 287486 | 1 |
| PAYC | 19 | 148642 | -4 |
| Average | 19 | 289924 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $290 million. That figure was $580 million in BWA’s case. SEI Investments Company (NASDAQ:SEIC) is the most popular stock in this table. On the other hand Micro Focus Intl PLC (NYSE:MFGP) is the least popular one with only 8 bullish hedge fund positions. BorgWarner Inc. (NYSE:BWA) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Hedge funds were also right about betting on BWA as the stock returned 23.2% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
