Is W.W. Grainger, Inc. (GWW) Going to Burn These Hedge Funds?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards W.W. Grainger, Inc. (NYSE:GWW) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is W.W. Grainger, Inc. (NYSE:GWW) a healthy stock for your portfolio? The best stock pickers were buying. The number of long hedge fund positions moved up by 2 recently. W.W. Grainger, Inc. (NYSE:GWW) was in 28 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 30. Our calculations also showed that GWW isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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.

Matthew Hulsizer of PEAK6 Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a look at the recent hedge fund action encompassing W.W. Grainger, Inc. (NYSE:GWW).

What have hedge funds been doing with W.W. Grainger, Inc. (NYSE:GWW)?

At the end of the second quarter, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the previous quarter. The graph below displays the number of hedge funds with bullish position in GWW over the last 20 quarters. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

The largest stake in W.W. Grainger, Inc. (NYSE:GWW) was held by Citadel Investment Group, which reported holding $129.4 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $125.3 million position. Other investors bullish on the company included Two Sigma Advisors, Millennium Management, and AQR Capital Management. In terms of the portfolio weights assigned to each position Albar Capital allocated the biggest weight to W.W. Grainger, Inc. (NYSE:GWW), around 8.57% of its 13F portfolio. Schonfeld Strategic Advisors is also relatively very bullish on the stock, designating 0.37 percent of its 13F equity portfolio to GWW.

Consequently, key money managers have been driving this bullishness. Albar Capital, managed by Javier Velazquez, created the most outsized position in W.W. Grainger, Inc. (NYSE:GWW). Albar Capital had $16.5 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $10.9 million position during the quarter. The following funds were also among the new GWW investors: Noam Gottesman’s GLG Partners, Greg Poole’s Echo Street Capital Management, and Ray Dalio’s Bridgewater Associates.

Let’s now take a look at hedge fund activity in other stocks similar to W.W. Grainger, Inc. (NYSE:GWW). These stocks are Occidental Petroleum Corporation (NYSE:OXY), Weyerhaeuser Co. (NYSE:WY), CMS Energy Corporation (NYSE:CMS), West Pharmaceutical Services Inc. (NYSE:WST), Smith & Nephew plc (NYSE:SNN), China Unicom (Hong Kong) Limited (NYSE:CHU), and CDW Corporation (NASDAQ:CDW). All of these stocks’ market caps are similar to GWW’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.3 hedge funds with bullish positions and the average amount invested in these stocks was $622 million. That figure was $427 million in GWW’s case. CDW Corporation (NASDAQ:CDW) is the most popular stock in this table. On the other hand China Unicom (Hong Kong) Limited (NYSE:CHU) is the least popular one with only 8 bullish hedge fund positions. W.W. Grainger, Inc. (NYSE:GWW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for GWW is 66.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. Hedge funds were also right about betting on GWW as the stock returned 11.1% during Q3 (through September 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.