How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding IHS Markit Ltd. (NASDAQ:INFO).
Is IHS Markit Ltd. (NASDAQ:INFO) the right investment to pursue these days? Money managers are in a bullish mood. The number of bullish hedge fund positions moved up by 4 in recent months. Our calculations also showed that INFO isn’t among the 30 most popular stocks among hedge funds. INFO was in 31 hedge funds’ portfolios at the end of the third quarter of 2018. There were 27 hedge funds in our database with INFO holdings 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 market by 18 percentage points since May 2014 through December 3, 2018 (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.
We’re going to review the fresh hedge fund action encompassing IHS Markit Ltd. (NASDAQ:INFO).
How are hedge funds trading IHS Markit Ltd. (NASDAQ:INFO)?
At Q3’s end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in INFO over the last 13 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
The largest stake in IHS Markit Ltd. (NASDAQ:INFO) was held by Select Equity Group, which reported holding $370.1 million worth of stock at the end of September. It was followed by Farallon Capital with a $272.8 million position. Other investors bullish on the company included Palestra Capital Management, Citadel Investment Group, and Millennium Management.
As one would reasonably expect, some big names were leading the bulls’ herd. Millennium Management, managed by Israel Englander, initiated the biggest position in IHS Markit Ltd. (NASDAQ:INFO). Millennium Management had $63.8 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $27 million investment in the stock during the quarter. The other funds with new positions in the stock are Steve Cohen’s Point72 Asset Management, Dmitry Balyasny’s Balyasny Asset Management, and Paul Marshall and Ian Wace’s Marshall Wace LLP.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as IHS Markit Ltd. (NASDAQ:INFO) but similarly valued. These stocks are Cerner Corporation (NASDAQ:CERN), Cintas Corporation (NASDAQ:CTAS), Palo Alto Networks Inc (NYSE:PANW), and Motorola Solutions Inc (NYSE:MSI). This group of stocks’ market valuations are closest to INFO’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CERN | 25 | 889948 | 3 |
| CTAS | 31 | 784446 | -3 |
| PANW | 46 | 2889148 | 4 |
| MSI | 26 | 839297 | 6 |
| Average | 32 | 1350710 | 2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $1.35 billion. That figure was $1.34 billion in INFO’s case. Palo Alto Networks Inc (NYSE:PANW) is the most popular stock in this table. On the other hand Cerner Corporation (NASDAQ:CERN) is the least popular one with only 25 bullish hedge fund positions. IHS Markit Ltd. (NASDAQ:INFO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard PANW might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
