Were Hedge Funds Right About The Charles Schwab Corporation (SCHW)?

In this article we will analyze whether The Charles Schwab Corporation (NYSE:SCHW) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market by double digits annually.

Is The Charles Schwab Corporation (NYSE:SCHW) an exceptional investment today? The smart money was selling. The number of bullish hedge fund positions retreated by 4 in recent months. The Charles Schwab Corporation (NYSE:SCHW) was in 72 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 76. Our calculations also showed that SCHW isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 76 hedge funds in our database with SCHW positions at the end of the first quarter.

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 79 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. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium stock. We go through lists like the 10 best EV 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. Now let’s take a peek at the fresh hedge fund action surrounding The Charles Schwab Corporation (NYSE:SCHW).

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

Heading into the third quarter of 2021, a total of 72 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SCHW over the last 24 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

The largest stake in The Charles Schwab Corporation (NYSE:SCHW) was held by Generation Investment Management, which reported holding $1036.2 million worth of stock at the end of June. It was followed by Route One Investment Company with a $488 million position. Other investors bullish on the company included Diamond Hill Capital, Egerton Capital Limited, and Intermede Investment Partners. In terms of the portfolio weights assigned to each position Yost Capital Management allocated the biggest weight to The Charles Schwab Corporation (NYSE:SCHW), around 14.3% of its 13F portfolio. Route One Investment Company is also relatively very bullish on the stock, earmarking 11.74 percent of its 13F equity portfolio to SCHW.

Because The Charles Schwab Corporation (NYSE:SCHW) has faced falling interest from the entirety of the hedge funds we track, logic holds that there is a sect of hedgies who were dropping their positions entirely heading into Q3. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management said goodbye to the largest investment of the “upper crust” of funds monitored by Insider Monkey, comprising about $92.3 million in stock. Jeffrey Hoffner’s fund, Engle Capital, also sold off its stock, about $37 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 4 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as The Charles Schwab Corporation (NYSE:SCHW) but similarly valued. We will take a look at Lowe’s Companies, Inc. (NYSE:LOW), Rio Tinto Group (NYSE:RIO), HDFC Bank Limited (NYSE:HDB), Intuit Inc. (NASDAQ:INTU), BlackRock, Inc. (NYSE:BLK), American Express Company (NYSE:AXP), and Starbucks Corporation (NASDAQ:SBUX). This group of stocks’ market caps match SCHW’s market cap.

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As you can see these stocks had an average of 50.1 hedge funds with bullish positions and the average amount invested in these stocks was $6886 million. That figure was $4852 million in SCHW’s case. Intuit Inc. (NASDAQ:INTU) is the most popular stock in this table. On the other hand Rio Tinto Group (NYSE:RIO) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks The Charles Schwab Corporation (NYSE:SCHW) is more popular among hedge funds. Our overall hedge fund sentiment score for SCHW is 79.4. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks returned 26.3% in 2021 through October 29th but still managed to beat the market by 2.3 percentage points. Hedge funds were also right about betting on SCHW as the stock returned 12.9% since the end of June (through 10/29) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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