How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding DXC Technology Company (NYSE:DXC) and determine whether hedge funds had an edge regarding this stock.
DXC Technology Company (NYSE:DXC) has experienced a decrease in support from the world's most elite money managers recently. DXC Technology Company (NYSE:DXC) was in 40 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 60. Our calculations also showed that DXC isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Larry Robbins of Glenview Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. With all of this in mind let's take a glance at the latest hedge fund action regarding DXC Technology Company (NYSE:DXC).
How are hedge funds trading DXC Technology Company (NYSE:DXC)?
At the end of the second quarter, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from one quarter earlier. On the other hand, there were a total of 41 hedge funds with a bullish position in DXC a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
The largest stake in DXC Technology Company (NYSE:DXC) was held by Glenview Capital, which reported holding $197.8 million worth of stock at the end of September. It was followed by Miller Value Partners with a $67 million position. Other investors bullish on the company included Maverick Capital, Arrowstreet Capital, and Atlantic Investment Management. In terms of the portfolio weights assigned to each position Atlantic Investment Management allocated the biggest weight to DXC Technology Company (NYSE:DXC), around 16.29% of its 13F portfolio. Glenview Capital is also relatively very bullish on the stock, designating 5.45 percent of its 13F equity portfolio to DXC.
Seeing as DXC Technology Company (NYSE:DXC) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there were a few hedgies who sold off their entire stakes last quarter. Intriguingly, Aaron Cowen's Suvretta Capital Management said goodbye to the biggest position of the "upper crust" of funds tracked by Insider Monkey, valued at about $8.5 million in stock, and Wallace Weitz's Wallace R. Weitz & Co. was right behind this move, as the fund dropped about $7.8 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 1 funds last quarter.
Let's check out hedge fund activity in other stocks similar to DXC Technology Company (NYSE:DXC). These stocks are Jefferies Financial Group Inc. (NYSE:JEF), Ashland Global Holdings Inc.. (NYSE:ASH), TerraForm Power Inc (NASDAQ:TERP), Exponent, Inc. (NASDAQ:EXPO), Pilgrim's Pride Corporation (NASDAQ:PPC), Allison Transmission Holdings Inc (NYSE:ALSN), and L Brands Inc (NYSE:LB). This group of stocks' market caps match DXC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JEF,37,586275,7 ASH,32,976347,0 TERP,21,235830,4 EXPO,19,92487,2 PPC,15,59157,-3 ALSN,32,542648,5 LB,42,1472803,3 Average,28.3,566507,2.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.3 hedge funds with bullish positions and the average amount invested in these stocks was $567 million. That figure was $530 million in DXC's case. L Brands Inc (NYSE:LB) is the most popular stock in this table. On the other hand Pilgrim's Pride Corporation (NASDAQ:PPC) is the least popular one with only 15 bullish hedge fund positions. DXC Technology Company (NYSE:DXC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DXC is 70.3. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on DXC as the stock returned 21.1% since Q2 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.