Were These Hedge Funds Right About Dumping The Clorox Company (CLX)?

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding The Clorox Company (NYSE:CLX).

The Clorox Company (NYSE:CLX) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 41. CLX investors should be aware of a decrease in hedge fund sentiment lately. There were 41 hedge funds in our database with CLX positions at the end of the first quarter. Our calculations also showed that CLX isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Richard Chilton of Chilton Investment Company

At Insider Monkey we scour multiple sources to uncover 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 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Now let’s take a look at the new hedge fund action surrounding The Clorox Company (NYSE:CLX).

How are hedge funds trading The Clorox Company (NYSE:CLX)?

At second quarter’s end, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards CLX over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Cedar Rock Capital held the most valuable stake in The Clorox Company (NYSE:CLX), which was worth $478.1 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $416.3 million worth of shares. AQR Capital Management, Citadel Investment Group, and Citadel Investment Group 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 Cedar Rock Capital allocated the biggest weight to The Clorox Company (NYSE:CLX), around 11.63% of its 13F portfolio. Southport Management is also relatively very bullish on the stock, earmarking 11.48 percent of its 13F equity portfolio to CLX.

Since The Clorox Company (NYSE:CLX) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of funds that decided to sell off their full holdings by the end of the second quarter. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dropped the largest position of the “upper crust” of funds watched by Insider Monkey, totaling close to $13 million in stock. Matthew Hulsizer’s fund, PEAK6 Capital Management, also sold off its stock, about $3.4 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 5 funds by the end of the second quarter.

Let’s now review hedge fund activity in other stocks similar to The Clorox Company (NYSE:CLX). We will take a look at Verisk Analytics, Inc. (NASDAQ:VRSK), IAC/InterActiveCorp (NASDAQ:IAC), Agilent Technologies Inc. (NYSE:A), Paychex, Inc. (NASDAQ:PAYX), IQVIA Holdings, Inc. (NYSE:IQV), The Hershey Company (NYSE:HSY), and CRH PLC (NYSE:CRH). All of these stocks’ market caps are closest to CLX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.3 hedge funds with bullish positions and the average amount invested in these stocks was $1965 million. That figure was $1489 million in CLX’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand CRH PLC (NYSE:CRH) is the least popular one with only 7 bullish hedge fund positions. The Clorox Company (NYSE:CLX) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CLX is 50.9. 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. 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately CLX wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CLX investors were disappointed as the stock returned -5.1% since the end of June (through 10/30) 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.