Was The Smart Money Right About Costco (COST)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Costco Wholesale Corporation (NASDAQ:COST).

Is Costco Wholesale Corporation (NASDAQ:COST) a buy, sell, or hold? The best stock pickers were selling. The number of bullish hedge fund bets retreated by 12 recently. Costco Wholesale Corporation (NASDAQ:COST) was in 61 hedge funds’ portfolios at the end of December. The all time high for this statistic is 73. Our calculations also showed that COST isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings). There were 73 hedge funds in our database with COST positions at the end of the third quarter.

To the average investor there are numerous signals shareholders have at their disposal to value their stock investments. Some of the less known signals are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the best picks of the elite investment managers can outperform the market by a very impressive margin (see the details here). Also, our monthly newsletter’s portfolio of long stock picks returned 197% since March 2017 (through March 2021) and beat the S&P 500 Index by 124 percentage points. You can download a sample issue of this newsletter on our website .

David Siegel of Two Sigma Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we’re going to take a gander at the new hedge fund action surrounding Costco Wholesale Corporation (NASDAQ:COST).

Do Hedge Funds Think COST Is A Good Stock To Buy Now?

At fourth quarter’s end, a total of 61 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from the third quarter of 2020. Below, you can check out the change in hedge fund sentiment towards COST over the last 22 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Costco Wholesale Corporation (NASDAQ:COST) was held by Fisher Asset Management, which reported holding $1330.3 million worth of stock at the end of December. It was followed by D E Shaw with a $421 million position. Other investors bullish on the company included AQR Capital Management, Two Sigma Advisors, and Bridgewater Associates. In terms of the portfolio weights assigned to each position Unio Capital allocated the biggest weight to Costco Wholesale Corporation (NASDAQ:COST), around 4.68% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, designating 4.54 percent of its 13F equity portfolio to COST.

Due to the fact that Costco Wholesale Corporation (NASDAQ:COST) has faced bearish sentiment from the smart money, logic holds that there is a sect of money managers who were dropping their positions entirely heading into Q1. Intriguingly, Renaissance Technologies dropped the biggest stake of all the hedgies monitored by Insider Monkey, comprising about $56.9 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also sold off its stock, about $54.9 million worth. These transactions are interesting, as total hedge fund interest fell by 12 funds heading into Q1.

Let’s now take a look at hedge fund activity in other stocks similar to Costco Wholesale Corporation (NASDAQ:COST). We will take a look at BHP Group (NYSE:BHP), Novo Nordisk A/S (NYSE:NVO), Chevron Corporation (NYSE:CVX), Eli Lilly and Company (NYSE:LLY), McDonald’s Corporation (NYSE:MCD), The Unilever Group (NYSE:UL), and Danaher Corporation (NYSE:DHR). This group of stocks’ market caps resemble COST’s market cap.

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As you can see these stocks had an average of 44.4 hedge funds with bullish positions and the average amount invested in these stocks was $3160 million. That figure was $3614 million in COST’s case. Danaher Corporation (NYSE:DHR) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 20 bullish hedge fund positions. Costco Wholesale Corporation (NASDAQ:COST) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for COST is 51.7. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and beat the market again by 1.6 percentage points. Unfortunately COST wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on COST were disappointed as the stock returned -0.8% since the end of December (through 4/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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

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