We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. That’s a big deal.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Xylem Inc (NYSE:XYL) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 19 hedge funds’ portfolios at the end of the third quarter of 2019. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Discovery Inc. (NASDAQ:DISCA), Broadridge Financial Solutions, Inc. (NYSE:BR), and Seagate Technology plc (NASDAQ:STX) to gather more data points. Our calculations also showed that XYL isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Richard Chilton of Chilton Investment Company
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s analyze the fresh hedge fund action regarding Xylem Inc (NYSE:XYL).
What have hedge funds been doing with Xylem Inc (NYSE:XYL)?
At Q3’s end, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in XYL over the last 17 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Xylem Inc (NYSE:XYL) was held by Impax Asset Management, which reported holding $343.6 million worth of stock at the end of September. It was followed by GAMCO Investors with a $117 million position. Other investors bullish on the company included Locust Wood Capital Advisers, Chilton Investment Company, and GLG Partners. In terms of the portfolio weights assigned to each position Impax Asset Management allocated the biggest weight to Xylem Inc (NYSE:XYL), around 4.48% of its 13F portfolio. Locust Wood Capital Advisers is also relatively very bullish on the stock, setting aside 1.76 percent of its 13F equity portfolio to XYL.
Since Xylem Inc (NYSE:XYL) has faced falling interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of fund managers who sold off their positions entirely last quarter. It’s worth mentioning that Clint Carlson’s Carlson Capital cut the largest position of the “upper crust” of funds followed by Insider Monkey, valued at close to $33.5 million in stock, and Alexander Mitchell’s Scopus Asset Management was right behind this move, as the fund said goodbye to about $13.4 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Xylem Inc (NYSE:XYL) but similarly valued. These stocks are Discovery Inc. (NASDAQ:DISCA), Broadridge Financial Solutions, Inc. (NYSE:BR), Seagate Technology plc (NASDAQ:STX), and UDR, Inc. (NYSE:UDR). This group of stocks’ market valuations match XYL’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DISCA | 26 | 418972 | 2 |
| BR | 27 | 312931 | 6 |
| STX | 26 | 2311475 | 3 |
| UDR | 21 | 560389 | 5 |
| Average | 25 | 900942 | 4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $901 million. That figure was $524 million in XYL’s case. Broadridge Financial Solutions, Inc. (NYSE:BR) is the most popular stock in this table. On the other hand UDR, Inc. (NYSE:UDR) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Xylem Inc (NYSE:XYL) is even less popular than UDR. Hedge funds dodged a bullet by taking a bearish stance towards XYL. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately XYL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); XYL investors were disappointed as the stock returned -2.4% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
