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 3M Company (NYSE:MMM) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Is 3M Company (NYSE:MMM) a buy, sell, or hold? Money managers were becoming less confident. The number of bullish hedge fund bets were cut by 2 lately. Our calculations also showed that MMM 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.
[caption id="attachment_673876" align="aligncenter" width="391"] John Overdeck of Two Sigma Advisors[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. 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. With all of this in mind we're going to view the recent hedge fund action surrounding 3M Company (NYSE:MMM).
How have hedgies been trading 3M Company (NYSE:MMM)?
At the end of the first quarter, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MMM over the last 18 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of 3M Company (NYSE:MMM), with a stake worth $152.4 million reported as of the end of September. Trailing Citadel Investment Group was Two Sigma Advisors, which amassed a stake valued at $81.1 million. Citadel Investment Group, AQR Capital Management, and Alyeska 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 DSAM Partners allocated the biggest weight to 3M Company (NYSE:MMM), around 3.93% of its 13F portfolio. Alyeska Investment Group is also relatively very bullish on the stock, setting aside 0.85 percent of its 13F equity portfolio to MMM.
Seeing as 3M Company (NYSE:MMM) has faced bearish sentiment from hedge fund managers, we can see that there exists a select few funds that decided to sell off their full holdings by the end of the first quarter. Intriguingly, Phill Gross and Robert Atchinson's Adage Capital Management said goodbye to the biggest investment of the 750 funds monitored by Insider Monkey, worth an estimated $117.9 million in stock, and Jonathan Barrett and Paul Segal's Luminus Management was right behind this move, as the fund said goodbye to about $10.8 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 2 funds by the end of the first quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as 3M Company (NYSE:MMM) but similarly valued. We will take a look at British American Tobacco plc (NYSE:BTI), CVS Health Corporation (NYSE:CVS), QUALCOMM, Incorporated (NASDAQ:QCOM), and Starbucks Corporation (NASDAQ:SBUX). All of these stocks' market caps resemble MMM's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BTI,10,681088,1 CVS,71,1273110,13 QCOM,60,1621172,-7 SBUX,68,3229437,2 Average,52.25,1701202,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 52.25 hedge funds with bullish positions and the average amount invested in these stocks was $1701 million. That figure was $517 million in MMM's case. CVS Health Corporation (NYSE:CVS) is the most popular stock in this table. On the other hand British American Tobacco plc (NYSE:BTI) is the least popular one with only 10 bullish hedge fund positions. 3M Company (NYSE:MMM) 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 MMM wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MMM investors were disappointed as the stock returned 15.4% 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.
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Disclosure: None. This article was originally published at Insider Monkey.