At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Dow Inc. (NYSE:DOW) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Dow Inc. (NYSE:DOW) shareholders have witnessed an increase in support from the world’s most elite money managers of late. Our calculations also showed that DOW 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.
Louis Bacon Moore of Moore Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to take a gander at the recent hedge fund action regarding Dow Inc. (NYSE:DOW).
Hedge fund activity in Dow Inc. (NYSE:DOW)
At Q1’s end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from the fourth quarter of 2019. On the other hand, there were a total of 0 hedge funds with a bullish position in DOW a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Pzena Investment Management held the most valuable stake in Dow Inc. (NYSE:DOW), which was worth $133.6 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $78 million worth of shares. Renaissance Technologies, Adage Capital Management, and Marshall Wace LLP 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 Lucas Capital Management allocated the biggest weight to Dow Inc. (NYSE:DOW), around 1.25% of its 13F portfolio. Pzena Investment Management is also relatively very bullish on the stock, earmarking 1.01 percent of its 13F equity portfolio to DOW.
As industrywide interest jumped, key money managers were leading the bulls’ herd. Pzena Investment Management, managed by Richard S. Pzena, established the most valuable position in Dow Inc. (NYSE:DOW). Pzena Investment Management had $133.6 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $78 million investment in the stock during the quarter. The other funds with brand new DOW positions are Renaissance Technologies, Phill Gross and Robert Atchinson’s Adage Capital Management, and Paul Marshall and Ian Wace’s Marshall Wace LLP.
Let’s go over hedge fund activity in other stocks similar to Dow Inc. (NYSE:DOW). These stocks are Otis Worldwide Corporation (NYSE:OTIS), FirstEnergy Corp. (NYSE:FE), The Clorox Company (NYSE:CLX), and American Water Works Company, Inc. (NYSE:AWK). This group of stocks’ market values are closest to DOW’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| OTIS | 4 | 13927 | 4 |
| FE | 44 | 1209775 | 4 |
| CLX | 41 | 2343925 | 14 |
| AWK | 30 | 633418 | 1 |
| Average | 29.75 | 1050261 | 5.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $1050 million. That figure was $376 million in DOW’s case. FirstEnergy Corp. (NYSE:FE) is the most popular stock in this table. On the other hand Otis Worldwide Corporation (NYSE:OTIS) is the least popular one with only 4 bullish hedge fund positions. Dow Inc. (NYSE:DOW) is not the most popular stock in this group but hedge fund interest is still above average. 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 still beat the market by 15.5 percentage points. Hedge funds were also right about betting on DOW as the stock returned 41.9% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.
