While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Costco Wholesale Corporation (NASDAQ:COST).
Costco Wholesale Corporation (NASDAQ:COST) investors should pay attention to a decrease in activity from the world's largest hedge funds recently. Costco Wholesale Corporation (NASDAQ:COST) was in 61 hedge funds' portfolios at the end of June. The all time high for this statistics is 70. Our calculations also showed that COST 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.
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Matthew Hulsizer of PEAK6 Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we're going to check out the fresh hedge fund action regarding Costco Wholesale Corporation (NASDAQ:COST).
What does smart money think about Costco Wholesale Corporation (NASDAQ:COST)?
At Q2's end, a total of 61 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in COST over the last 20 quarters. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Among these funds, Berkshire Hathaway held the most valuable stake in Costco Wholesale Corporation (NASDAQ:COST), which was worth $1313.9 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $995.4 million worth of shares. D E Shaw, Renaissance Technologies, and AQR Capital 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 Unio Capital allocated the biggest weight to Costco Wholesale Corporation (NASDAQ:COST), around 4.32% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, setting aside 4.25 percent of its 13F equity portfolio to COST.
Because Costco Wholesale Corporation (NASDAQ:COST) has experienced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there was a specific group of money managers who were dropping their positions entirely last quarter. Interestingly, John Overdeck and David Siegel's Two Sigma Advisors dropped the biggest investment of the "upper crust" of funds followed by Insider Monkey, comprising an estimated $170.3 million in stock, and Michael Gelband's ExodusPoint Capital was right behind this move, as the fund sold off about $5.7 million worth. These moves are interesting, as total hedge fund interest was cut by 7 funds last quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Costco Wholesale Corporation (NASDAQ:COST) but similarly valued. We will take a look at Bristol Myers Squibb Company (NYSE:BMY), T-Mobile US, Inc. (NASDAQ:TMUS), Sanofi (NASDAQ:SNY), Broadcom Inc (NASDAQ:AVGO), BHP Group (NYSE:BHP), Danaher Corporation (NYSE:DHR), and Medtronic plc (NYSE:MDT). This group of stocks' market values are similar to COST's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BMY,136,6605597,10 TMUS,113,7158311,48 SNY,24,1220415,9 AVGO,59,2378523,9 BHP,16,761158,-2 DHR,76,4287603,13 MDT,58,2705363,-1 Average,68.9,3588139,12.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 68.9 hedge funds with bullish positions and the average amount invested in these stocks was $3588 million. That figure was $4731 million in COST's case. Bristol Myers Squibb Company (NYSE:BMY) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 16 bullish hedge fund positions. Costco Wholesale Corporation (NASDAQ:COST) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for COST is 42.9. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. A small number of hedge funds were also right about betting on COST as the stock returned 26.1% since the end of the second quarter (through 10/16) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.