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Is CP A Good Stock To Buy According To Hedge Funds?

Debasis Saha
·6 min read

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. Insider Monkey finished processing 817 13F filings submitted by hedge funds and prominent investors. These filings show these funds' portfolio positions as of September 30th, 2020. In this article we are going to take a look at smart money sentiment towards Canadian Pacific Railway Limited (NYSE:CP).

Is CP a good stock to buy? Prominent investors were in a pessimistic mood. The number of long hedge fund positions decreased by 4 recently. Canadian Pacific Railway Limited (NYSE:CP) was in 32 hedge funds' portfolios at the end of September. The all time high for this statistic is 40. Our calculations also showed that CP isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 36 hedge funds in our database with CP holdings at the end of June. 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 66 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.

Aaron Cowen Suvretta Capital
Aaron Cowen Suvretta Capital

Aaron Cowen of Suvretta Capital Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. Keeping this in mind we're going to go over the fresh hedge fund action encompassing Canadian Pacific Railway Limited (NYSE:CP).

Do Hedge Funds Think CP Is A Good Stock To Buy Now?

At the end of September, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CP over the last 21 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CP A Good Stock To Buy?
Is CP A Good Stock To Buy?

More specifically, Egerton Capital Limited was the largest shareholder of Canadian Pacific Railway Limited (NYSE:CP), with a stake worth $963.4 million reported as of the end of September. Trailing Egerton Capital Limited was Suvretta Capital Management, which amassed a stake valued at $128.7 million. Arrowstreet Capital, Locust Wood Capital Advisers, and Point State Capital 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 SAYA Management allocated the biggest weight to Canadian Pacific Railway Limited (NYSE:CP), around 12.99% of its 13F portfolio. Heronetta Management is also relatively very bullish on the stock, designating 7.1 percent of its 13F equity portfolio to CP.

Seeing as Canadian Pacific Railway Limited (NYSE:CP) has faced declining sentiment from hedge fund managers, it's safe to say that there lies a certain "tier" of hedgies who were dropping their positions entirely last quarter. At the top of the heap, Israel Englander's Millennium Management dumped the biggest position of the "upper crust" of funds followed by Insider Monkey, valued at about $91.9 million in stock. Anand Parekh's fund, Alyeska Investment Group, also cut its stock, about $40.3 million worth. These moves are important to note, as aggregate hedge fund interest fell by 4 funds last quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Canadian Pacific Railway Limited (NYSE:CP) but similarly valued. We will take a look at Honda Motor Co Ltd (NYSE:HMC), Digital Realty Trust, Inc. (NYSE:DLR), Eaton Corporation plc (NYSE:ETN), DuPont de Nemours Inc (NYSE:DD), Baxter International Inc. (NYSE:BAX), National Grid plc (NYSE:NGG), and American Electric Power Company, Inc. (NYSE:AEP). All of these stocks' market caps resemble CP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HMC,11,314104,1 DLR,25,252076,-1 ETN,35,586037,1 DD,61,3679088,-3 BAX,51,2025150,-8 NGG,6,379092,4 AEP,30,436472,-4 Average,31.3,1096003,-1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.3 hedge funds with bullish positions and the average amount invested in these stocks was $1096 million. That figure was $1467 million in CP's case. DuPont de Nemours Inc (NYSE:DD) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 6 bullish hedge fund positions. Canadian Pacific Railway Limited (NYSE:CP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CP is 48.6. 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. 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 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on CP as the stock returned 12.9% since the end of Q3 (through 12/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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