Was The Smart Money Right About Embracing VMware, Inc. (VMW)?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of VMware, Inc. (NYSE:VMW).

VMware, Inc. (NYSE:VMW) shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. VMware, Inc. (NYSE:VMW) was in 42 hedge funds’ portfolios at the end of June. The all time high for this statistics is 43. There were 27 hedge funds in our database with VMW positions at the end of the first quarter. Our calculations also showed that VMW isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Thomas Claugus of GMT Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a look at the new hedge fund action encompassing VMware, Inc. (NYSE:VMW).

What does smart money think about VMware, Inc. (NYSE:VMW)?

At Q2’s end, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 56% from the first quarter of 2020. By comparison, 34 hedge funds held shares or bullish call options in VMW a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

The largest stake in VMware, Inc. (NYSE:VMW) was held by Renaissance Technologies, which reported holding $121.7 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $116.9 million position. Other investors bullish on the company included Antipodes Partners, GMT Capital, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position GMT Capital allocated the biggest weight to VMware, Inc. (NYSE:VMW), around 4.34% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, dishing out 4.16 percent of its 13F equity portfolio to VMW.

As one would reasonably expect, key hedge funds have jumped into VMware, Inc. (NYSE:VMW) headfirst. Antipodes Partners, managed by Jacob Mitchell, assembled the largest position in VMware, Inc. (NYSE:VMW). Antipodes Partners had $91.8 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $32.5 million position during the quarter. The other funds with brand new VMW positions are Dmitry Balyasny’s Balyasny Asset Management, Schonfeld Strategic Advisors, and Michael Gelband’s ExodusPoint Capital.

Let’s now take a look at hedge fund activity in other stocks similar to VMware, Inc. (NYSE:VMW). We will take a look at Automatic Data Processing (NASDAQ:ADP), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Canadian National Railway Company (NYSE:CNI), Colgate-Palmolive Company (NYSE:CL), China Petroleum & Chemical Corp (NYSE:SNP), Equinix Inc (NASDAQ:EQIX), and Advanced Micro Devices, Inc. (NASDAQ:AMD). This group of stocks’ market caps are closest to VMW’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.9 hedge funds with bullish positions and the average amount invested in these stocks was $1744 million. That figure was $696 million in VMW’s case. Advanced Micro Devices, Inc. (NASDAQ:AMD) is the most popular stock in this table. On the other hand China Petroleum & Chemical Corp (NYSE:SNP) is the least popular one with only 10 bullish hedge fund positions. VMware, Inc. (NYSE:VMW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VMW is 78.3. 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 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately VMW wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VMW were disappointed as the stock returned -3.7% since the end of June (through 10/23) 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 so far this year.

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