Should You Avoid Xylem Inc (NYSE:XYL)?

Is Xylem Inc (NYSE:XYL) a safe investment now? Prominent investors are turning less bullish. The number of bullish hedge fund bets stayed the same which is a slightly negative development in our experience

According to most stock holders, hedge funds are perceived as slow, old financial vehicles of years past. While there are more than 8000 funds trading today, we look at the crème de la crème of this group, close to 450 funds. It is widely believed that this group oversees the lion’s share of the hedge fund industry’s total asset base, and by paying attention to their top picks, we have identified a number of investment strategies that have historically outpaced Mr. Market. Our small-cap hedge fund strategy outstripped the S&P 500 index by 18 percentage points a year for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have outpaced the S&P 500 index by 25 percentage points in 6.5 month (see all of our picks from August).

Equally as key, positive insider trading sentiment is a second way to break down the stock market universe. Just as you’d expect, there are lots of reasons for a corporate insider to get rid of shares of his or her company, but only one, very simple reason why they would buy. Plenty of academic studies have demonstrated the market-beating potential of this tactic if shareholders understand where to look (learn more here).

Now, let’s take a glance at the recent action encompassing Xylem Inc (NYSE:XYL).

What have hedge funds been doing with Xylem Inc (NYSE:XYL)?

At the end of the fourth quarter, a total of 16 of the hedge funds we track held long positions in this stock, a change of 0% from one quarter earlier. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes significantly.

According to our comprehensive database, Jeffrey Gates’s Gates Capital Management had the largest position in Xylem Inc (NYSE:XYL), worth close to $115 million, comprising 7.2% of its total 13F portfolio. Sitting at the No. 2 spot is Mario Gabelli of GAMCO Investors, with a $83 million position; 0% of its 13F portfolio is allocated to the stock. Some other peers that hold long positions include Phill Gross and Robert Atchinson’s Adage Capital Management, D. E. Shaw’s D E Shaw and Steven Cohen’s SAC Capital Advisors.

Because Xylem Inc (NYSE:XYL) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of hedgies who sold off their entire stakes heading into 2013. Interestingly, David Harding’s Winton Capital Management dumped the largest stake of all the hedgies we track, comprising about $4 million in stock., and John Overdeck and David Siegel of Two Sigma Advisors was right behind this move, as the fund dropped about $1 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Insider trading activity in Xylem Inc (NYSE:XYL)

Insider trading activity, especially when it’s bullish, is best served when the company in question has experienced transactions within the past six months. Over the last half-year time frame, Xylem Inc (NYSE:XYL) has experienced zero unique insiders buying, and 5 insider sales (see the details of insider trades here).

With the returns exhibited by Insider Monkey’s strategies, retail investors must always pay attention to hedge fund and insider trading activity, and Xylem Inc (NYSE:XYL) shareholders fit into this picture quite nicely.

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Insider Monkey’s small-cap strategy returned 29.2% between September 2012 and February 2013 versus 8.7% for the S&P 500 index. Try it now by clicking the link above.