Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged during the first quarter. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 40% and 25% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the first 5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Costco Wholesale Corporation (NASDAQ:COST) going to take off soon? Prominent investors are getting less bullish. The number of bullish hedge fund positions retreated by 4 in recent months. Our calculations also showed that COST isn’t among the 30 most popular stocks among hedge funds. COST was in 44 hedge funds’ portfolios at the end of March. There were 48 hedge funds in our database with COST holdings at the end of the previous quarter.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Sander Gerber of Hudson Bay Capital
We’re going to check out the fresh hedge fund action encompassing Costco Wholesale Corporation (NASDAQ:COST).
What have hedge funds been doing with Costco Wholesale Corporation (NASDAQ:COST)?
At the end of the first quarter, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards COST over the last 15 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Berkshire Hathaway, managed by Warren Buffett, holds the most valuable position in Costco Wholesale Corporation (NASDAQ:COST). Berkshire Hathaway has a $1.0493 billion position in the stock, comprising 0.5% of its 13F portfolio. Sitting at the No. 2 spot is Fisher Asset Management, managed by Ken Fisher, which holds a $566.9 million position; the fund has 0.8% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism encompass Cliff Asness’s AQR Capital Management, Jim Simons’s Renaissance Technologies and Ken Griffin’s Citadel Investment Group.
Because Costco Wholesale Corporation (NASDAQ:COST) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there exists a select few fund managers that decided to sell off their entire stakes heading into Q3. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dropped the largest investment of the “upper crust” of funds watched by Insider Monkey, worth an estimated $228 million in stock, and Richard Chilton’s Chilton Investment Company was right behind this move, as the fund cut about $88.1 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 4 funds heading into Q3.
Let’s now take a look at hedge fund activity in other stocks similar to Costco Wholesale Corporation (NASDAQ:COST). These stocks are HDFC Bank Limited (NYSE:HDB), Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR), GlaxoSmithKline plc (NYSE:GSK), and AstraZeneca plc (NYSE:AZN). This group of stocks’ market values are similar to COST’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HDB | 24 | 961489 | -4 |
| PBR | 30 | 2312742 | -2 |
| GSK | 29 | 1850155 | 6 |
| AZN | 28 | 1672921 | 7 |
| Average | 27.75 | 1699327 | 1.75 |
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 $1699 million. That figure was $3324 million in COST’s case. Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR) is the most popular stock in this table. On the other hand HDFC Bank Limited (NYSE:HDB) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Costco Wholesale Corporation (NASDAQ:COST) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on COST, though not to the same extent, as the stock returned 0% during the same period and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
