Were Hedge Funds Right About Dumping IBM?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtInternational Business Machines Corp. (NYSE:IBM) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

International Business Machines Corp. (NYSE:IBM) shareholders have witnessed a decrease in support from the world’s most elite money managers lately. IBM was in 41 hedge funds’ portfolios at the end of the first quarter of 2020. There were 50 hedge funds in our database with IBM positions at the end of the previous quarter. Our calculations also showed that IBM 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).

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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.

Michael Lowenstein of Kensico Capital

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. Keeping this in mind let’s take a look at the recent hedge fund action encompassing International Business Machines Corp. (NYSE:IBM).

How have hedgies been trading International Business Machines Corp. (NYSE:IBM)?

At Q1’s end, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the previous quarter. On the other hand, there were a total of 46 hedge funds with a bullish position in IBM a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Among these funds, Kensico Capital held the most valuable stake in International Business Machines Corp. (NYSE:IBM), which was worth $218 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $212.9 million worth of shares. AQR Capital Management, Arrowstreet Capital, and Adage Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Kensico Capital allocated the biggest weight to International Business Machines Corp. (NYSE:IBM), around 5.96% of its 13F portfolio. Beddow Capital Management is also relatively very bullish on the stock, dishing out 5.38 percent of its 13F equity portfolio to IBM.

Judging by the fact that International Business Machines Corp. (NYSE:IBM) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedgies that decided to sell off their positions entirely by the end of the first quarter. Intriguingly, Renaissance Technologies cut the largest stake of all the hedgies watched by Insider Monkey, comprising close to $207.3 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also sold off its stock, about $18.3 million worth. These moves are interesting, as total hedge fund interest was cut by 9 funds by the end of the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as International Business Machines Corp. (NYSE:IBM) but similarly valued. We will take a look at Union Pacific Corporation (NYSE:UNP), Tesla Inc. (NASDAQ:TSLA), Danaher Corporation (NYSE:DHR), and American Tower Corporation (REIT) (NYSE:AMT). This group of stocks’ market values resemble IBM’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 61 hedge funds with bullish positions and the average amount invested in these stocks was $3145 million. That figure was $903 million in IBM’s case. Union Pacific Corporation (NYSE:UNP) is the most popular stock in this table. On the other hand American Tower Corporation (REIT) (NYSE:AMT) is the least popular one with only 57 bullish hedge fund positions. Compared to these stocks International Business Machines Corp. (NYSE:IBM) is even less popular than AMT. Hedge funds dodged a bullet by taking a bearish stance towards IBM. Our calculations showed that the top 10 most popular hedge fund stocks 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 managed to beat the market by 15.5 percentage points. Unfortunately IBM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); IBM investors were disappointed as the stock returned 10.3% during the second quarter 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 most of these stocks already outperformed the market so far in 2020.

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