Is Xylem Inc (XYL) A Good Stock To Buy?

Before we spend days researching a stock idea we’d like to take a look at how hedge funds and billionaire investors recently traded that stock. S&P 500 Index returned about 7.6% during the last 12 months ending November 21, 2016. Most investors don’t notice that less than 49% of the stocks in the index outperformed the index. This means you (or a monkey throwing a dart) have less than an even chance of beating the market by randomly picking a stock. On the other hand, the top 30 mid-cap stocks among the best performing hedge funds had an average return of 18% during the same period. Hedge funds had bad stock picks like everyone else. We are sure you have read about their worst picks, like Valeant, in the media over the past year. So, taking cues from hedge funds isn’t a foolproof strategy, but it seems to work on average. In this article, we will take a look at what hedge funds think about Xylem Inc (NYSE:XYL).

Xylem Inc (NYSE:XYL) was in 17 hedge funds’ portfolios at the end of the third quarter of 2016. XYL investors should be aware of a decrease in enthusiasm from smart money in recent months. There were 21 hedge funds in our database with XYL positions at the end of the previous quarter. At the end of this article we will also compare XYL to other stocks including CBRE Group Inc (NYSE:CBG), Vereit Inc (NYSE:VER), and Bancolombia SA (ADR)(NYSE:CIB) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Now, let’s view the key action encompassing Xylem Inc (NYSE:XYL).

Hedge fund activity in Xylem Inc (NYSE:XYL)

Heading into the fourth quarter of 2016, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a drop of 19% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in XYL over the last 5 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Mario Gabelli’s GAMCO Investors has the biggest position in Xylem Inc (NYSE:XYL), worth close to $203.1 million, comprising 1.3% of its total 13F portfolio. The second largest stake is held by Impax Asset Management, led by Ian Simm, which has a $113.1 million position; 5.2% of its 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions comprise Anand Parekh’s Alyeska Investment Group, Cliff Asness’ AQR Capital Management and Robert Joseph Caruso’s Select Equity Group. We should note that Impax Asset Management is among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Because Xylem Inc (NYSE:XYL) has faced a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of money managers who sold off their positions entirely last quarter. At the top of the heap, Jim Simons’ Renaissance Technologies got rid of the largest position of the “upper crust” of funds studied by Insider Monkey, comprising about $27.3 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund cut about $5.5 million worth of shares.

Let’s now take a look at hedge fund activity in other stocks similar to Xylem Inc (NYSE:XYL). We will take a look at CBRE Group Inc (NYSE:CBG), Vereit Inc (NYSE:VER), Bancolombia SA (ADR) (NYSE:CIB), and Buckeye Partners, L.P. (NYSE:BPL). This group of stocks’ market values match XYL’s market value.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $673 million. That figure was $469 million in XYL’s case. CBRE Group Inc (NYSE:CBG) is the most popular stock in this table. On the other hand Bancolombia SA (ADR) (NYSE:CIB) is the least popular one with only 9 bullish hedge fund positions. Xylem Inc (NYSE:XYL) 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 CBG might be a better candidate to consider taking a long position in.

Disclosure: none.