Were Hedge Funds Right About Ditching HP Inc. (HPQ)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of HP Inc. (NYSE:HPQ) based on that data and determine whether they were really smart about the stock.

Is HP Inc. (NYSE:HPQ) a healthy stock for your portfolio? Money managers were becoming less hopeful. The number of bullish hedge fund positions dropped by 6 recently. Our calculations also showed that HPQ isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). HPQ was in 43 hedge funds’ portfolios at the end of March. There were 49 hedge funds in our database with HPQ positions at the end of the previous quarter.

Video: 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 a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Seth Klarman of Baupost Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the recent hedge fund action encompassing HP Inc. (NYSE:HPQ).

How have hedgies been trading HP Inc. (NYSE:HPQ)?

At Q1’s end, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the previous quarter. By comparison, 35 hedge funds held shares or bullish call options in HPQ a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Carl Icahn’s Icahn Capital LP has the most valuable position in HP Inc. (NYSE:HPQ), worth close to $1.092 billion, comprising 6.1% of its total 13F portfolio. On Icahn Capital LP’s heels is Baupost Group, led by Seth Klarman, holding a $347.2 million position; the fund has 5.1% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish encompass Alec Litowitz and Ross Laser’s Magnetar Capital, D. E. Shaw’s D E Shaw and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Icahn Capital LP allocated the biggest weight to HP Inc. (NYSE:HPQ), around 6.07% of its 13F portfolio. Baupost Group is also relatively very bullish on the stock, designating 5.13 percent of its 13F equity portfolio to HPQ.

Since HP Inc. (NYSE:HPQ) has experienced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of funds who sold off their positions entirely heading into Q4. At the top of the heap, Renaissance Technologies cut the largest investment of the 750 funds monitored by Insider Monkey, comprising about $95.7 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund dropped about $32.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 6 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as HP Inc. (NYSE:HPQ) but similarly valued. These stocks are Alcon Inc. (NYSE:ALC), AFLAC Incorporated (NYSE:AFL), DexCom, Inc. (NASDAQ:DXCM), and China Telecom Corporation Limited (NYSE:CHA). This group of stocks’ market values are similar to HPQ’s market value.

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As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $558 million. That figure was $2181 million in HPQ’s case. DexCom, Inc. (NASDAQ:DXCM) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 5 bullish hedge fund positions. HP Inc. (NYSE:HPQ) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately HPQ wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HPQ were disappointed as the stock returned 1.4% during the same time period 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.