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Did Hedge Funds Drop The Ball On Xerox Holdings Corporation (XRX) ?

Abigail Fisher

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Xerox Holdings Corporation (NYSE:XRX) was in 32 hedge funds' portfolios at the end of the third quarter of 2019. XRX investors should pay attention to an increase in hedge fund sentiment recently. There were 28 hedge funds in our database with XRX positions at the end of the previous quarter. Our calculations also showed that XRX isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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' 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_30600" align="aligncenter" width="520"] Bruce Kovner of Caxton Associates[/caption]

Bruce Kovner, Caxton Associates LP

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 review the latest hedge fund action regarding Xerox Holdings Corporation (NYSE:XRX).

How are hedge funds trading Xerox Holdings Corporation (NYSE:XRX)?

At the end of the third quarter, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 14% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in XRX over the last 17 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

XRX_dec2019

More specifically, Icahn Capital was the largest shareholder of Xerox Holdings Corporation (NYSE:XRX), with a stake worth $701.6 million reported as of the end of September. Trailing Icahn Capital was AQR Capital Management, which amassed a stake valued at $233.7 million. Citadel Investment Group, Arrowstreet Capital, and Falcon Edge 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 Falcon Edge Capital allocated the biggest weight to Xerox Holdings Corporation (NYSE:XRX), around 5.06% of its portfolio. Icahn Capital is also relatively very bullish on the stock, designating 2.73 percent of its 13F equity portfolio to XRX.

As one would reasonably expect, specific money managers have been driving this bullishness. Alyeska Investment Group, managed by Anand Parekh, initiated the most valuable position in Xerox Corporation (NYSE:XRX). Alyeska Investment Group had $9 million invested in the company at the end of the quarter. Paul Tudor Jones's Tudor Investment Corp also initiated a $3.1 million position during the quarter. The other funds with new positions in the stock are Matthew Tewksbury's Stevens Capital Management, Brandon Haley's Holocene Advisors, and Bruce Kovner's Caxton Associates.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Xerox Holdings Corporation (NYSE:XRX) but similarly valued. These stocks are EQM Midstream Partners LP (NYSE:EQM), Logitech International SA (NASDAQ:LOGI), CAE, Inc. (NYSE:CAE), and SL Green Realty Corp (NYSE:SLG). All of these stocks' market caps match XRX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EQM,11,35867,3 LOGI,14,213458,-2 CAE,11,145277,1 SLG,24,440534,9 Average,15,208784,2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $209 million. That figure was $1169 million in XRX's case. SL Green Realty Corp (NYSE:SLG) is the most popular stock in this table. On the other hand EQM Midstream Partners LP (NYSE:EQM) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Xerox Holdings Corporation (NYSE:XRX) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on XRX as the stock returned 30.2% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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