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Should You Avoid Canadian National Railway Company (CNI)?

Reymerlyn Martin

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Canadian National Railway Company (NYSE:CNI) to find out whether it was one of their high conviction long-term ideas.

Is Canadian National Railway Company (NYSE:CNI) worth your attention right now? The smart money is selling. The number of bullish hedge fund bets shrunk by 1 recently. Our calculations also showed that CNI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). CNI was in 27 hedge funds' portfolios at the end of September. There were 28 hedge funds in our database with CNI positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_745225" align="aligncenter" width="1613"] Noam Gottesman of GLG Partners[/caption]

Noam Gottesman GLG Partners

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a gander at the key hedge fund action regarding Canadian National Railway Company (NYSE:CNI).

How have hedgies been trading Canadian National Railway Company (NYSE:CNI)?

Heading into the fourth quarter of 2019, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CNI over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

CNI_dec2019

The largest stake in Canadian National Railway Company (NYSE:CNI) was held by Bill & Melinda Gates Foundation Trust, which reported holding $1539 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $336 million position. Other investors bullish on the company included D E Shaw, GLG Partners, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Canadian National Railway Company (NYSE:CNI), around 7.25% of its portfolio. Signition LP is also relatively very bullish on the stock, setting aside 1.73 percent of its 13F equity portfolio to CNI.

Due to the fact that Canadian National Railway Company (NYSE:CNI) has witnessed a decline in interest from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of fund managers that decided to sell off their positions entirely in the third quarter. It's worth mentioning that Todd J. Kantor's Encompass Capital Advisors sold off the biggest investment of the "upper crust" of funds tracked by Insider Monkey, comprising an estimated $9.3 million in stock. Sara Nainzadeh's fund, Centenus Global Management, also sold off its stock, about $9.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds in the third quarter.

Let's now review hedge fund activity in other stocks similar to Canadian National Railway Company (NYSE:CNI). We will take a look at The Southern Company (NYSE:SO), Northrop Grumman Corporation (NYSE:NOC), ConocoPhillips (NYSE:COP), and Colgate-Palmolive Company (NYSE:CL). This group of stocks' market valuations are closest to CNI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SO,31,1190703,9 NOC,43,843083,6 COP,65,2901952,8 CL,42,2061209,0 Average,45.25,1749237,5.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 45.25 hedge funds with bullish positions and the average amount invested in these stocks was $1749 million. That figure was $2085 million in CNI's case. ConocoPhillips (NYSE:COP) is the most popular stock in this table. On the other hand The Southern Company (NYSE:SO) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Canadian National Railway Company (NYSE:CNI) is even less popular than SO. Hedge funds dodged a bullet by taking a bearish stance towards CNI. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CNI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CNI investors were disappointed as the stock returned 1.4% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.

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

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