Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by nearly 9 percentage points since the end of the third quarter of 2018 as investors worried over the possible ramifications of rising interest rates and 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 298 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 BorgWarner Inc. (NYSE:BWA) and see how the stock is affected by the recent hedge fund activity.
BorgWarner Inc. (NYSE:BWA) was in 21 hedge funds' portfolios at the end of the first quarter of 2019. BWA has seen a decrease in enthusiasm from smart money lately. There were 22 hedge funds in our database with BWA holdings at the end of the previous quarter. Our calculations also showed that BWA 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
We're going to analyze the new hedge fund action regarding BorgWarner Inc. (NYSE:BWA).
What does the smart money think about BorgWarner Inc. (NYSE:BWA)?
At Q1's end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the previous quarter. The graph below displays the number of hedge funds with bullish position in BWA over the last 15 quarters. With hedge funds' capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Diamond Hill Capital, managed by Ric Dillon, holds the number one position in BorgWarner Inc. (NYSE:BWA). Diamond Hill Capital has a $381.9 million position in the stock, comprising 2.1% of its 13F portfolio. The second largest stake is held by Ariel Investments, led by John W. Rogers, holding a $66.2 million position; 0.8% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that hold long positions contain D. E. Shaw's D E Shaw, Israel Englander's Millennium Management and Mario Gabelli's GAMCO Investors.
Judging by the fact that BorgWarner Inc. (NYSE:BWA) has witnessed declining sentiment from the smart money, logic holds that there was a specific group of hedge funds who were dropping their full holdings heading into Q3. At the top of the heap, Ray Dalio's Bridgewater Associates dumped the biggest position of the "upper crust" of funds watched by Insider Monkey, valued at about $7.4 million in stock, and Robert Polak's Anchor Bolt Capital was right behind this move, as the fund said goodbye to about $6.6 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 1 funds heading into Q3.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as BorgWarner Inc. (NYSE:BWA) but similarly valued. These stocks are Post Holdings Inc (NYSE:POST), Momo Inc (NASDAQ:MOMO), Guidewire Software Inc (NYSE:GWRE), and CPFL Energia S.A. (NYSE:CPL). All of these stocks' market caps match BWA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position POST,27,1333879,-1 MOMO,21,826292,0 GWRE,26,688585,6 CPL,2,16292,0 Average,19,716262,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $716 million. That figure was $667 million in BWA's case. Post Holdings Inc (NYSE:POST) is the most popular stock in this table. On the other hand CPFL Energia S.A. (NYSE:CPL) is the least popular one with only 2 bullish hedge fund positions. BorgWarner Inc. (NYSE:BWA) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately BWA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on BWA were disappointed as the stock returned -4.2% during the same period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.