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Do Hedge Funds Love W.W. Grainger, Inc. (GWW)?

Reymerlyn Martin

Is W.W. Grainger, Inc. (NYSE:GWW) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

W.W. Grainger, Inc. (NYSE:GWW) shareholders have witnessed an increase in enthusiasm from smart money of late. Our calculations also showed that GWW 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

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 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 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_255014" align="aligncenter" width="600"] Clint Carlson of Carlson Capital[/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. We're going to take a peek at the key hedge fund action encompassing W.W. Grainger, Inc. (NYSE:GWW).

Hedge fund activity in W.W. Grainger, Inc. (NYSE:GWW)

At the end of the third quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from the previous quarter. The graph below displays the number of hedge funds with bullish position in GWW over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

More specifically, Two Sigma Advisors was the largest shareholder of W.W. Grainger, Inc. (NYSE:GWW), with a stake worth $86.5 million reported as of the end of September. Trailing Two Sigma Advisors was Citadel Investment Group, which amassed a stake valued at $67.5 million. Alyeska Investment Group, D E Shaw, and Renaissance Technologies 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 Alyeska Investment Group allocated the biggest weight to W.W. Grainger, Inc. (NYSE:GWW), around 1.01% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, setting aside 0.78 percent of its 13F equity portfolio to GWW.

Consequently, specific money managers have been driving this bullishness. Alyeska Investment Group, managed by Anand Parekh, assembled the largest position in W.W. Grainger, Inc. (NYSE:GWW). Alyeska Investment Group had $66.8 million invested in the company at the end of the quarter. Clint Carlson's Carlson Capital also made a $43.1 million investment in the stock during the quarter. The other funds with brand new GWW positions are Dmitry Balyasny's Balyasny Asset Management, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, and Mike Vranos's Ellington.

Let's now review hedge fund activity in other stocks similar to W.W. Grainger, Inc. (NYSE:GWW). We will take a look at Trip.com Group Limited (NASDAQ:CTRP), Cheniere Energy, Inc. (NYSEAMEX:LNG), Shinhan Financial Group Co., Ltd. (NYSE:SHG), and Avangrid, Inc. (NYSE:AGR). This group of stocks' market valuations are similar to GWW's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CTRP,35,876950,8 LNG,40,3859554,-3 SHG,4,8676,-1 AGR,14,361586,2 Average,23.25,1276692,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $1277 million. That figure was $526 million in GWW's case. Cheniere Energy, Inc. (NYSEAMEX:LNG) is the most popular stock in this table. On the other hand Shinhan Financial Group Co., Ltd. (NYSE:SHG) is the least popular one with only 4 bullish hedge fund positions. W.W. Grainger, Inc. (NYSE:GWW) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on GWW, though not to the same extent, as the stock returned 7.1% during the first two months of the fourth quarter and outperformed the market.

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

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