Were Hedge Funds Right About Sherwin-Williams (SHW)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Melvin Capital’s recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards The Sherwin-Williams Company (NYSE:SHW).

The Sherwin-Williams Company (NYSE:SHW) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. The Sherwin-Williams Company (NYSE:SHW) was in 49 hedge funds’ portfolios at the end of December. The all time high for this statistic is 57. Our calculations also showed that SHW isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 124 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Joel Greenblatt of Gotham Asset Management

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. Keeping this in mind we’re going to take a gander at the new hedge fund action encompassing The Sherwin-Williams Company (NYSE:SHW).

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

At Q4’s end, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the third quarter of 2020. On the other hand, there were a total of 55 hedge funds with a bullish position in SHW a year ago. With the smart money’s capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

The largest stake in The Sherwin-Williams Company (NYSE:SHW) was held by Chilton Investment Company, which reported holding $305.3 million worth of stock at the end of December. It was followed by Farallon Capital with a $286.1 million position. Other investors bullish on the company included Diamond Hill Capital, Two Sigma Advisors, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Chilton Investment Company allocated the biggest weight to The Sherwin-Williams Company (NYSE:SHW), around 8.71% of its 13F portfolio. Bluegrass Capital Partners is also relatively very bullish on the stock, setting aside 8.18 percent of its 13F equity portfolio to SHW.

Because The Sherwin-Williams Company (NYSE:SHW) has experienced bearish sentiment from the smart money, logic holds that there was a specific group of hedge funds that elected to cut their full holdings last quarter. At the top of the heap, Anand Parekh’s Alyeska Investment Group said goodbye to the biggest position of all the hedgies monitored by Insider Monkey, valued at close to $22 million in stock. Ray Dalio’s fund, Bridgewater Associates, also dropped its stock, about $10.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 6 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to The Sherwin-Williams Company (NYSE:SHW). We will take a look at The Bank of Nova Scotia (NYSE:BNS), CME Group Inc (NASDAQ:CME), NetEase, Inc (NASDAQ:NTES), The Southern Company (NYSE:SO), Enbridge Inc (NYSE:ENB), Intercontinental Exchange Inc (NYSE:ICE), and Truist Financial Corporation (NYSE:TFC). This group of stocks’ market values match SHW’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.3 hedge funds with bullish positions and the average amount invested in these stocks was $1494 million. That figure was $1881 million in SHW’s case. CME Group Inc (NASDAQ:CME) is the most popular stock in this table. On the other hand The Bank of Nova Scotia (NYSE:BNS) is the least popular one with only 19 bullish hedge fund positions. The Sherwin-Williams Company (NYSE:SHW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SHW is 63.3. 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. 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 still beat the market by 1.6 percentage points. Hedge funds were also right about betting on SHW, though not to the same extent, as the stock returned 12.1% since Q4 (through April 30th) and outperformed the market as well.

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