We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn't the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds' positions on December 31st. We at Insider Monkey have made an extensive database of more than 835 of those established hedge funds and famous value investors' filings. In this article, we analyze how these elite funds and prominent investors traded CDW Corporation (NASDAQ:CDW) based on those filings.
CDW Corporation (NASDAQ:CDW) shares haven't seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 30 hedge funds' portfolios at the end of December. At the end of this article we will also compare CDW to other stocks including CBRE Group, Inc. (NYSE:CBRE), Hewlett Packard Enterprise Company (NYSE:HPE), and Hess Corporation (NYSE:HES) to get a better sense of its popularity.
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 41 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.
[caption id="attachment_364869" align="aligncenter" width="399"] Thomas Bancroft of Makaira Partners[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind we're going to take a look at the fresh hedge fund action regarding CDW Corporation (NASDAQ:CDW).
What does smart money think about CDW Corporation (NASDAQ:CDW)?
At Q4's end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CDW over the last 18 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
Among these funds, Select Equity Group held the most valuable stake in CDW Corporation (NASDAQ:CDW), which was worth $511.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $167.2 million worth of shares. GLG Partners, LFL Advisers, and Makaira Partners 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 LFL Advisers allocated the biggest weight to CDW Corporation (NASDAQ:CDW), around 35.89% of its 13F portfolio. Makaira Partners is also relatively very bullish on the stock, setting aside 12.08 percent of its 13F equity portfolio to CDW.
Seeing as CDW Corporation (NASDAQ:CDW) has experienced a decline in interest from the smart money, we can see that there were a few hedgies that slashed their entire stakes by the end of the third quarter. It's worth mentioning that Ken Griffin's Citadel Investment Group dropped the largest position of the 750 funds monitored by Insider Monkey, valued at close to $0.9 million in stock, and John Overdeck and David Siegel's Two Sigma Advisors was right behind this move, as the fund dumped about $0.7 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks similar to CDW Corporation (NASDAQ:CDW). These stocks are CBRE Group, Inc. (NYSE:CBRE), Hewlett Packard Enterprise Company (NYSE:HPE), Hess Corporation (NYSE:HES), and Pembina Pipeline Corp (NYSE:PBA). This group of stocks' market valuations match CDW's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CBRE,30,1499210,-1 HPE,41,1048549,10 HES,34,536867,-4 PBA,17,48892,5 Average,30.5,783380,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 30.5 hedge funds with bullish positions and the average amount invested in these stocks was $783 million. That figure was $1085 million in CDW's case. Hewlett Packard Enterprise Company (NYSE:HPE) is the most popular stock in this table. On the other hand Pembina Pipeline Corp (NYSE:PBA) is the least popular one with only 17 bullish hedge fund positions. CDW Corporation (NASDAQ:CDW) 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately CDW wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CDW investors were disappointed as the stock returned -38.9% during the same time period 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 most of these stocks already outperformed the market in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.