Is Xylem Inc (XYL) a Good Buy?

The worries about the economic slowdown in China and the ongoing uncertainty about the path of interest-rate increases triggered several waves of equity sell-offs during the third quarter. Of course, most hedge funds and other asset managers had to stomach substantial losses during the bloody three-month period, which might have caused some to consider fleeing the U.S. equity markets. Interestingly, smaller-cap stocks registered higher losses than large-capitalization stocks during the September quarter, suggesting that institutional investors heavily discarded seemingly riskier equities amid high uncertainty and turmoil. In fact, the Russell 2000 Index lost 11.9% in the third quarter, while the Standard and Poor’s 500 benchmark declined a mere 6.4%. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Xylem Inc (NYSE:XYL).

Is Xylem Inc (NYSE:XYL) a buy, sell, or hold? Hedge funds are getting less bullish. The number of long hedge fund bets went down by 5 in recent months. XYL was in 23 hedge funds’ portfolios at the end of the third quarter of 2015. There were 28 hedge funds in our database with XYL holdings at the end of the previous quarter. At the end of this article we will also compare XYL to other stocks including SVB Financial Group (NASDAQ:SIVB), Macquarie Infrastructure Company LLC (NYSE:MIC), and Domino’s Pizza, Inc. (NYSE:DPZ) to get a better sense of its popularity.

If you’d ask most investors, hedge funds are perceived as underperforming, outdated financial vehicles of years past. While there are greater than 8000 funds trading today, Our experts choose to focus on the moguls of this club, about 700 funds. These investment experts have their hands on the majority of the hedge fund industry’s total capital, and by keeping track of their inimitable investments, Insider Monkey has found various investment strategies that have historically exceeded the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy defeated the S&P 500 index by 12 percentage points annually for a decade in their back tests.

Now, we’re going to take a look at the fresh action surrounding Xylem Inc (NYSE:XYL).

Hedge fund activity in Xylem Inc (NYSE:XYL)

Heading into Q4, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the second quarter. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Mario Gabelli’s GAMCO Investors has the largest position in Xylem Inc (NYSE:XYL), worth close to $140.9 million, amounting to 0.9% of its total 13F portfolio. The second largest stake is held by Israel Englander of Millennium Management, with a $85.4 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish comprise Ian Simm’s Impax Asset Management, Ken Griffin’s Citadel Investment Group and D E Shaw.

Due to the fact that Xylem Inc (NYSE:XYL) has experienced bearish sentiment from hedge fund managers, we can see that there was a specific group of hedge funds that slashed their positions entirely last quarter. Intriguingly, Jim Simons’ Renaissance Technologies dropped the biggest stake of the 700 funds monitored by Insider Monkey, worth about $9.7 million in stock, and Lawrence Sapanski’s Scoria Capital was right behind this move, as the fund dropped about $4.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 5 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Xylem Inc (NYSE:XYL) but similarly valued. These stocks are SVB Financial Group (NASDAQ:SIVB), Macquarie Infrastructure Company LLC (NYSE:MIC), Domino’s Pizza, Inc. (NYSE:DPZ), and NiSource Inc. (NYSE:NI). All of these stocks’ market caps match XYL’s market cap.

As you can see these stocks had an average of 38.5 hedge funds with bullish positions and the average amount invested in these stocks was $862 million. That figure was $488 million in XYL’s case. Macquarie Infrastructure Company LLC (NYSE:MIC) is the most popular stock in this table. On the other hand NiSource Inc. (NYSE:NI) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks Xylem Inc (NYSE:XYL) is as less popular as NI. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.