Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter of 2018. Trends reversed 180 degrees in 2019 amid Powell's pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the third quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards International Business Machines Corp. (NYSE:IBM).
Is International Business Machines Corp. (NYSE:IBM) a healthy stock for your portfolio? Investors who are in the know are reducing their bets on the stock. The number of bullish hedge fund positions shrunk by 3 in recent months. Our calculations also showed that IBM 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' 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.
[caption id="attachment_189632" align="aligncenter" width="450"] David Harding of Winton 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. We're going to review the key hedge fund action encompassing International Business Machines Corp. (NYSE:IBM).
What does smart money think about International Business Machines Corp. (NYSE:IBM)?
At the end of the third quarter, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the previous quarter. By comparison, 43 hedge funds held shares or bullish call options in IBM a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
The largest stake in International Business Machines Corp. (NYSE:IBM) was held by AQR Capital Management, which reported holding $435.8 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $416.3 million position. Other investors bullish on the company included Adage Capital Management, Two Sigma Advisors, and Winton Capital Management. In terms of the portfolio weights assigned to each position Beddow Capital Management allocated the biggest weight to International Business Machines Corp. (NYSE:IBM), around 5.17% of its portfolio. Levin Capital Strategies is also relatively very bullish on the stock, designating 3.18 percent of its 13F equity portfolio to IBM.
Judging by the fact that International Business Machines Corp. (NYSE:IBM) has witnessed declining sentiment from the smart money, it's safe to say that there lies a certain "tier" of hedgies that elected to cut their full holdings by the end of the third quarter. At the top of the heap, Karim Abbadi and Edward McBride's Centiva Capital dropped the biggest investment of the "upper crust" of funds followed by Insider Monkey, valued at close to $2.5 million in stock. Anthony Scaramucci's fund, Skybridge Capital, also dropped its stock, about $2.3 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 3 funds by the end of the third quarter.
Let's check out hedge fund activity in other stocks similar to International Business Machines Corp. (NYSE:IBM). We will take a look at Costco Wholesale Corporation (NASDAQ:COST), BHP Group (NYSE:BHP), Accenture Plc (NYSE:ACN), and Novo Nordisk A/S (NYSE:NVO). This group of stocks' market valuations are similar to IBM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COST,51,3861914,11 BHP,21,800372,2 ACN,42,1120846,4 NVO,21,3007327,4 Average,33.75,2197615,5.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $2198 million. That figure was $1570 million in IBM's case. Costco Wholesale Corporation (NASDAQ:COST) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 21 bullish hedge fund positions. International Business Machines Corp. (NYSE:IBM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 IBM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on IBM were disappointed as the stock returned -6.5% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.