Were Hedge Funds Right About Shunning Canadian Pacific Railway Limited (CP)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Canadian Pacific Railway Limited (NYSE:CP) and determine whether hedge funds skillfully traded this stock.

Canadian Pacific Railway Limited (NYSE:CP) has seen an increase in activity from the world’s largest hedge funds in recent months. CP was in 32 hedge funds’ portfolios at the end of March. There were 29 hedge funds in our database with CP positions at the end of the previous quarter. Our calculations also showed that CP 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 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.

John Armitage of Egerton 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. 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 gander at the key hedge fund action surrounding Canadian Pacific Railway Limited (NYSE:CP).

What have hedge funds been doing with Canadian Pacific Railway Limited (NYSE:CP)?

At the end of the first quarter, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the fourth quarter of 2019. On the other hand, there were a total of 30 hedge funds with a bullish position in CP a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Egerton Capital Limited, managed by John Armitage, holds the number one position in Canadian Pacific Railway Limited (NYSE:CP). Egerton Capital Limited has a $702.3 million position in the stock, comprising 7.3% of its 13F portfolio. Coming in second of Lone Pine Capital, with a $500.5 million position; the fund has 3% of its 13F portfolio invested in the stock. Some other peers that hold long positions encompass Ken Griffin’s Citadel Investment Group, Brandon Haley’s Holocene Advisors and Stephen J. Errico’s Locust Wood Capital Advisers. In terms of the portfolio weights assigned to each position SAYA Management allocated the biggest weight to Canadian Pacific Railway Limited (NYSE:CP), around 8.24% of its 13F portfolio. Heronetta Management is also relatively very bullish on the stock, setting aside 7.41 percent of its 13F equity portfolio to CP.

With a general bullishness amongst the heavyweights, specific money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the most outsized position in Canadian Pacific Railway Limited (NYSE:CP). Arrowstreet Capital had $17.9 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $15.3 million position during the quarter. The following funds were also among the new CP investors: Anand More’s SAYA Management, Joel Greenblatt’s Gotham Asset Management, and Anand Parekh’s Alyeska Investment Group.

Let’s go over hedge fund activity in other stocks similar to Canadian Pacific Railway Limited (NYSE:CP). We will take a look at The Bank of New York Mellon Corporation (NYSE:BK), Mizuho Financial Group Inc. (NYSE:MFG), Dell Technologies Inc. (NYSE:DELL), and Emerson Electric Co. (NYSE:EMR). All of these stocks’ market caps are similar to CP’s market cap.

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As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $1707 million. That figure was $1569 million in CP’s case. The Bank of New York Mellon Corporation (NYSE:BK) is the most popular stock in this table. On the other hand Mizuho Financial Group Inc. (NYSE:MFG) is the least popular one with only 6 bullish hedge fund positions. Canadian Pacific Railway Limited (NYSE:CP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 and surpassed the market by 15.5 percentage points. Unfortunately CP wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CP investors were disappointed as the stock returned 16.6% 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 in 2020.

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