It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 35% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Colgate-Palmolive Company (NYSE:CL).
Hedge fund interest in Colgate-Palmolive Company (NYSE:CL) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Equinor ASA (NYSE:EQNR), Enterprise Products Partners L.P. (NYSE:EPD), and The PNC Financial Services Group, Inc. (NYSE:PNC) to gather more data points. Our calculations also showed that CL isn't among the 30 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/caption]
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 look at the fresh hedge fund action surrounding Colgate-Palmolive Company (NYSE:CL).
What have hedge funds been doing with Colgate-Palmolive Company (NYSE:CL)?
Heading into the fourth quarter of 2019, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 33 hedge funds with a bullish position in CL a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, AQR Capital Management was the largest shareholder of Colgate-Palmolive Company (NYSE:CL), with a stake worth $431.7 million reported as of the end of September. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $335.4 million. D E Shaw, Alkeon Capital Management, and VGI 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 VGI Partners allocated the biggest weight to Colgate-Palmolive Company (NYSE:CL), around 12.55% of its portfolio. GuardCap Asset Management is also relatively very bullish on the stock, setting aside 5.89 percent of its 13F equity portfolio to CL.
Judging by the fact that Colgate-Palmolive Company (NYSE:CL) has witnessed declining sentiment from the smart money, it's safe to say that there exists a select few hedgies that elected to cut their entire stakes by the end of the third quarter. Intriguingly, George Soros's Soros Fund Management dumped the largest position of the "upper crust" of funds watched by Insider Monkey, worth an estimated $19.7 million in stock. Ken Griffin's fund, Citadel Investment Group, also dumped its stock, about $17.6 million worth. These moves are important to note, as aggregate 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 - not necessarily in the same industry as Colgate-Palmolive Company (NYSE:CL) but similarly valued. We will take a look at Equinor ASA (NYSE:EQNR), Enterprise Products Partners L.P. (NYSE:EPD), The PNC Financial Services Group, Inc. (NYSE:PNC), and Intuitive Surgical, Inc. (NASDAQ:ISRG). This group of stocks' market values are similar to CL's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EQNR,14,392283,1 EPD,21,301985,2 PNC,39,2074279,1 ISRG,41,1400552,4 Average,28.75,1042275,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.75 hedge funds with bullish positions and the average amount invested in these stocks was $1042 million. That figure was $2061 million in CL's case. Intuitive Surgical, Inc. (NASDAQ:ISRG) is the most popular stock in this table. On the other hand Equinor ASA (NYSE:EQNR) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Colgate-Palmolive Company (NYSE:CL) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately CL wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CL were disappointed as the stock returned -8.7% during the fourth quarter (through 11/22) 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.