Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of 3M Company (NYSE:MMM) and see how the stock is affected by the recent hedge fund activity.
3M Company (NYSE:MMM) has seen an increase in hedge fund interest lately. MMM was in 45 hedge funds' portfolios at the end of September. There were 40 hedge funds in our database with MMM positions at the end of the previous quarter. Our calculations also showed that MMM isn't among the 30 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_365194" align="aligncenter" width="450"] David E. Shaw of D.E. Shaw[/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 new hedge fund action regarding 3M Company (NYSE:MMM).
What have hedge funds been doing with 3M Company (NYSE:MMM)?
Heading into the fourth quarter of 2019, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from the second quarter of 2019. On the other hand, there were a total of 34 hedge funds with a bullish position in MMM a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Two Sigma Advisors held the most valuable stake in 3M Company (NYSE:MMM), which was worth $270.4 million at the end of the third quarter. On the second spot was D E Shaw which amassed $99.8 million worth of shares. AQR Capital Management, Citadel Investment Group, and Millennium Management 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 Ratan Capital Group allocated the biggest weight to 3M Company (NYSE:MMM), around 1% of its portfolio. Stevens Capital Management is also relatively very bullish on the stock, setting aside 0.9 percent of its 13F equity portfolio to MMM.
As one would reasonably expect, specific money managers were leading the bulls' herd. Stevens Capital Management, managed by Matthew Tewksbury, initiated the most valuable position in 3M Company (NYSE:MMM). Stevens Capital Management had $10 million invested in the company at the end of the quarter. Benjamin A. Smith's Laurion Capital Management also made a $7.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Benjamin A. Smith's Laurion Capital Management, Brandon Haley's Holocene Advisors, and Kenneth Tropin's Graham Capital Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as 3M Company (NYSE:MMM) but similarly valued. These stocks are Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR), PetroChina Company Limited (NYSE:PTR), QUALCOMM, Incorporated (NASDAQ:QCOM), and Charter Communications, Inc. (NASDAQ:CHTR). This group of stocks' market values match MMM's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PBR,30,2022999,-2 PTR,11,106487,2 QCOM,55,1817218,-6 CHTR,63,8306950,-3 Average,39.75,3063414,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 39.75 hedge funds with bullish positions and the average amount invested in these stocks was $3063 million. That figure was $826 million in MMM's case. Charter Communications, Inc. (NASDAQ:CHTR) is the most popular stock in this table. On the other hand PetroChina Company Limited (NYSE:PTR) is the least popular one with only 11 bullish hedge fund positions. 3M Company (NYSE:MMM) 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 MMM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MMM were disappointed as the stock returned 2.8% 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.